SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
For the fiscal year ended March 31, 2005
Commission file number 00032559
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
AN ONTARIO, CANADA CORPORATION
366 BAY STREET, 12TH FLOOR, TORONTO, ONTARIO M5H 4B2
(416) 815-1771; FAX (416) 815-1259
RESTATEMENT
The consolidated financial statements have been restated to include the
consolidated statements of operations and the consolidated statements of cash
flows for the three years ended March 31, 2005, 2004, and 2003 in accordance
with the requirements of Items 8 and 17 of Form 20-F and Rule 3-02 of Regulation
S-X and to give effect to the change in accounting policy disclosed in Note 2(b)
and correction of errors disclosed in Note 19 to the consolidated financial
statements. The restatement was audited by the independent auditors as reflected
in an independent auditors' report attached to the financial statements.
PLEASE NOTE THAT ALL VALUES ARE EXPRESSED IN CANADIAN DOLLARS WITH US DOLLARS
SHOWN IN THE BRACKETS.
3A. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the consolidated financial statements and the notes thereto attached beginning
at page F2 Of this registration and Item 5 "Operating and Financial Review and
Prospects".
Year Year Year
Ended Ended Ended
March 31/03 March 31/04 March 31, 2005
Year Year Consolidated Consolidated Consolidated
Ended Ended (Restated- (Restated- (Restated-
March 31/01 March 31/02 Note 2(b), Note 2(b), Note 2(b),
Consolidated Consolidated 19 and 20) 19 and 20) 19 and 20)
Operations Audited Audited Audited Audited Audited
Sales 2,508,122 1,227,878 1,479,254 465,812 199,794
Cost of Sales 737,562 348,525 529,820 122,055 32,277
Gross Profit 1,770,560 879,353 949,434 343,757 167,517
Expenses 2,659,616 1,914,661 1,788,775 1,337,592 988,993
Settlement of debt (75,000)
Gain on dilution 67,000
Net Loss -889,056 -1,035,308 -764,341 -926,835 -821,476
Income per
Share -0.82 -0.87 -0.30 -0.13 -0.07
Weighted
Average 1,083,563 1,192,182 2,540,846 7,359,209 12,135,646
PAGE 1
BALANCE SHEET
INFORMATION
Current Assets 145,506 139,267 86,520 43,314 53,933
Capital Assets 184,876 135,304 101,913 73,543 57,463
Goodwill 258,739 190,501
Total Assets 589,121 465,072 188,433 116,857 111,396
Accounts Payable and
Accrued Liabilities 471,251 607,996 788.808 907,656 1,004,461
Income Tax Payable 2,415 2,415 2,415 - -
Deferred Revenue 15,961 170,967 3,346 874 6,146
Loans Payable 76,561 76,900 30,779 - 35,095
Due to Shareholders 36,300 109,725 250,736 9,086 249,324
Note Payable 90,000 90,000 15,000 - -
Convertible Note 125,144 117,544 100,908 89,146
Minority Interest 1,000 1,000
Total Liabilities 692,488 1,183,147 1,206,213 1,019,524 1,385,172
Capital Stock 1,350,126 1,770,726 2,191,082 2,731,086 3,158,521
Contributed Surplus 44,280 546,224 569,156
Retained Earnings -1,453,493 -2,488,801 -3,253,142 -4,179,977 -5,001,453
Equity -103,367 -718,075 -1,017,780 -902,667 -1,273,776
Liabilities and
Shareholders Equity 589,121 465,072 188,433 116,857 111,396
Item 3D
Risk Factors
Phinder Technology recorded the following losses in fiscal years 2001, 2002,
2003, 2004 and 2005 consolidated statements. In the year ended March 31, 2001,
$1,035,308 (659,642) in the year ended March 31, 2002, $764,341 (520,208) in the
year ended March 31, 2003, $926,835 (707,238) in the year ended March 31, 2004
and $821,476 (679,130) in the year ended March 31, 2005. Our prospects must be
considered in light of the risks, expenses, and difficulties frequently
encountered by companies in their early stages of development.
We expect to continue to incur losses on a monthly basis until approximately
November 2005. There can be no assurance that we will not continue to incur
losses after November 2005, or that any of our business strategies will be
successful.
Our Independent accountants have expressed a going concern qualification in
footnote # 1 to our audited financial statements. Because of our operating
losses of the past six years and our working capital deficiency as at March 31,
2005, our continuance as a going concern is dependent upon our ability to obtain
adequate financing or to reach profitable levels of operation. It is not
possible to predict whether financing efforts will be successful or if we will
attain profitable levels of operations.
Our common shares are considered to be penny stock, which may adversely affect
the liquidity of our common shares. The Securities and Exchange Commission has
PAGE 2
adopted regulations that define a penny stock to be any equity security that has
a market price, as defined in those regulations, of less than U.S. $5.00 per
share, subject to certain exceptions. Generally, for any transaction involving a
penny stock, a broker-dealer is required to deliver, prior to the transaction, a
disclosure schedule relating to the penny stock market as well as disclosure
concerning, among other things, the commissions payable, current quotations for
the securities and information on the limited market in penny stocks. The
administration requirements imposed by these rules may affect the liquidity of
our common shares.
It may be difficult for our Shareholders to enforce civil liabilities under the
U.S. Federal Securities Laws because we are a Canadian Corporation, incorporated
under Canadian law. The majority of our directors and executive officers are
Canadian citizens or residents. All, or a substantial portion, of these persons'
assets and substantially all of our assets are located outside the United
States. It may not be possible for investors to effect service of process within
the United States upon those persons or to enforce against them judgments of
U.S. Courts based upon civil liabilities under U.S. federal or state securities
laws.
Changes in laws and regulations regarding the dissemination of Content may
restrict our ability to sell or license our products. While we have not been
subject to any enforcement action to prohibit the dissemination of any of our
content to our customers, many territories prohibit the publication of material
defined as "obscene" or in similar terms. If a territory determines that our
content is obscene according to their legal definition of that term, we may be
prohibited from carrying on business in certain jurisdictions, and may be
subject to criminal penalties. There can be no guarantee that we will not be
faced with restrictions on carrying on all or part of our business in the
future.
Control of the Corporation is concentrated in a small number of Shareholders.
Our officers, directors and their affiliates, in the beneficially own
approximately 52% of our outstanding common shares. These shareholders, acting
together, would be able to control most matters requiring approval by
shareholders, including the election of directors. Concentration of large
amounts of our shares in the hands of the principal shareholders may also make
more difficult any takeover, buy-out or change of control of the Corporation not
approved by management.
We may not be able to rise additional financing to sustain growth. Based on
current projections, we will require additional financing in the amount of
500,000 (413,359) to $1,000,000(826,720) between November 2005 and March 2006.
We anticipate raising these funds through private placements of our securities
with sophisticated investors. We have avoided obtaining debt financing but may
have to pursue this option if we are unable to obtain equity financing on
acceptable terms. If we are unable to obtain financing and cannot pay our debts
as they come due, we may be forced to solicit a buyer for the company or be
forced into bankruptcy by our creditors.
We are dependent on a small number of key personnel. We are dependent upon one
key person: John A. van Arem. Mr. van Arem is knowledgeable about all aspects of
our business and has developed relationships in the entertainment industry that
facilitate our business and maintains on a day-to-day basis business
relationships with service providers, customers, investors, and media. The loss
of these individual could have a material adverse effect on our business. We
have no key-man life insurance policies on this individual.
We may not be able to maintain our competitive position. The Internet
entertainment industry involves rapid technological change and is characterized
by intense and substantial competition. A number of our competitors are well
established, substantially larger and have substantially greater market
PAGE 3
recognition, greater resources and broader distribution capabilities than we
have. New competitors are continually emerging. Increased competition by
existing and future competitors could materially and adversely affect our
profitability. Moreover, our success depends on maintaining a high quality of
content. Competition for quality content in the Internet entertainment industry
is intense. The lack of availability of unique quality content could adversely
affect our business.
The entertainment industry is sensitive to economic conditions. When economic
conditions are prosperous, entertainment industry revenues increase; conversely,
when economic conditions are unfavorable, entertainment industry revenues
decline. Any significant decline in general corporate conditions or the economy
that affect consumer spending could have a material adverse effect on our
business.
Our Business is sensitive to capacity constraints and systems failures. We do
not have any business interruption insurance. The stability of our online
services is critical to our reputation, customer retention and achieving market
acceptance of our online web sites destinations. Any system failure, including
network, software or hardware failure, that causes interruption or an increase
in response time of our online services could result in decreased usage of our
services and, if sustained or repeated, could reduce the attractiveness of our
online services to our clients. An increase in the volume of queries conducted
through our online services could strain the capacity of the software or the
hardware we employ, which could lead to slower response time or system failures,
thereby adversely affecting our revenues. We also face technical challenges
associated with higher levels of personalization and localization of content
delivered to users of our online services. Our operations are also dependent in
part upon our ability to protect our operating systems against physical damage
from acts of God, power loss, telecommunications failures, physical break-ins
and similar events. If our back-up systems fail, the occurrence of any of these
events could result in interruptions, delays or cessations in service to users
of our online services, which could have a material adverse affect on our,
results of operations and financial condition. We do not have any business
interruption insurance.
We are also dependent upon search engines, web browsers, Internet service
providers and online service providers to provide Internet users access to our
web sites. Clients may experience difficulties accessing or using any of our web
sites due to system failures or delays unrelated to our operating systems. Any
sustained failure or delay could reduce the attractiveness of our web sites to
our clients. The occurrence of any of the foregoing events could have a material
adverse effect on our business, results of operations and financial condition.
We may be vulnerable to online security risks. Our network may be vulnerable to
unauthorized access, computer viruses and other disruptive problems. We may be
required to expend significant capital or other resources to protect against the
threat of security breaches or to alleviate problems caused by such breaches.
There can be no assurance that such measures will not be circumvented in the
future. If our security systems fail, eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to clients accessing our web sites that could have a
material adverse effect on our business, results of operations and financial
condition.
Our intellectual property may not be adequately protected. Our domain names,
trade secrets and, to a lesser extent our trademarks are critical to our
success. We rely on a combination of copyright and trademark laws, trade secret
protection, confidentiality and non-disclosure agreements and contractual
provisions to protect our intellectual property. There is no guarantee that
these efforts will be adequate; that we will be able to secure appropriate
registrations for all of our marks; or that third parties will not infringe upon
PAGE 4
or misappropriate our proprietary rights. Future litigation may be necessary to
enforce and protect our intellectual property rights. We may also be subject to
litigation to defend against claims of infringement of the rights of others or
to determine the scope and validity of the intellectual property rights of
others, which could be costly, divert management's attention, result in the loss
of certain of our proprietary rights, require us to seek licenses from third
parties and prevent us from selling our services, any one of which could have a
material adverse effect on our business, results of operations and financial
condition.
We face potential liability for Internet content. We face potential liability
for negligence, copyright, patent, trademark infringement, defamation,
indecency, disparagement and other claims based on the nature and content of the
materials that we transmit. In addition, we could be exposed to liability with
respect to the unauthorized duplication or transmission of content. Our
insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed. In addition, the
indemnification for such liability that we generally require from our content
providers may be inadequate.
Any imposition of liability that is not covered by insurance, is in excess of
insurance coverage or is not covered by an indemnification by a content provider
could have a material adverse effect on our business, results of operations and
financial condition.
We may be impeded or prohibited from carrying on business by governmental
regulation. Few laws or regulations currently are directly applicable to access
or commerce on the Internet. However, a number of legislative and regulatory
proposals are under consideration by governments in jurisdictions in which we
conduct business, and, as a result, a number of laws or regulations may be
adopted with respect to Internet user privacy, taxation, infringement, pricing,
quality of products and services and intellectual property ownership. It is also
uncertain as to how existing laws will be applied to the Internet in areas such
as property ownership, copyright, trademark, trade secret, obscenity and
defamation. The adoption of new laws or the adaptation of existing laws to the
Internet may decrease the growth in the use of the Internet, which could in turn
decrease the demand for our online services, increase the cost of doing business
or otherwise have a material adverse effect on our business, results of
operations and financial condition.
Risks associated with brand development. We believe that establishing and
maintaining brand identity of our web site destinations is critical to our
future success. Promotion and enhancement of our brands will depend largely on
our success in continuing to provide high quality online services, which cannot
be assured. In order to attract and retain subscribers and to promote and
maintain its brands in response to competitive pressures, we may find it
necessary to increase substantially our financial commitment to creating and
maintaining a distinct brand loyalty among our clients. If we are unable to
provide high quality online services, or otherwise fail to promote and maintain
our brands, incur excessive expenses in an attempt to improve, or promote and
maintain our brands, our business, results of operations and financial condition
could be materially and adversely affected.
Foreign Exchange Risk. We have foreign exchange risk because our functional
currency is Canadian dollars and substantially all of our sales are made to U.S.
consumers. An adverse move in foreign exchange rates between the Canadian and
United States dollar could have an adverse effect on our operating results. We
do not hedge against this risk.
PAGE 5
Item 4A.4
Information on the Company
In management's view there are three key components to success: exposure,
conversion and retention. Phinder Technologies Inc has experienced the
difficulties in competing in the online entertainment industry. Worldwide issues
with charge-backs on credit cards have made doing business online more
difficult, especially as it relates to any industry credit card companies refer
to as high-risk, such as on line sales of pharmaceuticals, online gaming and
entertainment. By levying heavy fines on merchants that exceed the 2.5%
chargeback (a charge back is where a customer disputes the charge on their
credit card statement and requests a refund from the bank which passes this on
to the merchant) threshold, companies in the online entertainment industry have
been forced to intensify the scrubbing of customer credit cards. Scrubbing is
the any form of verification or elimination of groups of credit card users to
reduce the overall charge back percentage. As such a large number of good
customers are turned away to reduce chargeback by a fraction of one percent. For
instance if the charge-backs from one country are percentage wise much higher
than the average, i.e. if the average is 2% but one country has an average of
4.5%, the credit card processing company will simply disallow anyone from that
country to use a credit card. This means that to get rid of this 4.5% of bad
customers from that country 95.5% of good customers are also turned away. This
trend of intensified scrubbing has meant that the overall conversions meaning
the percentage of people that buy your services versus the number that visit
your site has dropped significantly and in many cases more than 50%. The cost of
marketing and the cost of traffic has not really come down so the cost to
acquire new customers virtually doubled in many cases.
Additionally with the proliferation of the webcam content providers have
sprouted up all over the world. Many of them are underselling larger and
established content providers, driving the price of content down. The price for
memberships or one-on-one conferencing is still the same in many cases or has
even gone up. The main issue is the cost of marketing as an ever-increasing
number of companies competing for the same eyeballs.
Phinder Technologies Inc sought to get away from competing with everyone for the
same eyeballs. Rather than engaging competitors using methods readily available
to all, the company decided to create an audience as opposed to competing for
the same one. Over one year ago the company started to explore the possibility
of providing in room computers to hotels and with that turn-key internet access.
In return the Company would keep all traffic and outsource mainstream content.
The solution was rather costly.
At the same time, formerly wholly owned subsidiary Avrada Inc (Avrada) that
spun-off to form a standalone company, obtained non-exclusive North American
rights as well as exclusive European rights to provide directory services on the
Telecenter device in hotel rooms. The completed software, the InterACT software
platform bundled together with unique patented hardware and proprietary software
that form the Telecenter Solution courtesy of Avrada's business partner iCit
America Inc ("iCit)", provides hotel owners with a means of improving revenue,
occupancy and guest satisfaction by first offering High Speed Internet Access in
every hotel room, and then capitalizing on the unique captive audience that is
created.
The device will be deployed in North America. Additionally Avrada acquired the
exclusive distribution rights for the device in Europe, where Phinder
Technologies Inc will also be contracted to provide the same services as in
North America.
Phinder Technologies Inc will not only benefit from all the directory content it
can provide through the devices but will additionally benefit from Avrada's
growth as Phinder Technologies Inc remains a large shareholder in Avrada with
over
PAGE 6
4,000,000 shares currently giving it about a 40% stake in its formerly wholly
owned subsidiary.
Phinder Technologies Inc launched the sale of its web presence package (Internet
Bundle) in January 2005. After over one year of development the company is
currently selling a package enabling small companies to create a web presence
with its turn key package. The service is sold using telemarketing partners and
the billing is done by various billing houses in the United States.
The product is currently not offered outside the United States and this is
currently the sole focus of Phinder Technologies Inc. The company plans to
expand its services offered in the online Business to Business realm in the near
future.
Item 5A.1
Operating Results
Twelve Months Ended March 31, 2005 Compared to the Twelve Months Ended March 31,
2004
For the twelve months ended March 31, 2005 revenue was $199,794 (US$ 165,174)
compared to $465,812 (US$ 355,446) for the period ending March 31, 2004, a
decrease of 57.1%. The significant decline in revenue was mainly attributable to
the decrease in sales volume and prices. Also as a result of the unfavorable US
exchange rate (1.2096 in year 2005 compared to 1.3105 in 2004), the revenue was
decreased by $16,666.
Cost of sales was $32,277 (26,817) for the twelve months ended March 31, 2005
representing 16% of revenue for that period, compared to $122,055 (93,136) for
the twelve months ended March 31, 2004 representing 26% of revenue for that
period. The main reason for the decrease in cost of sales is attributable to
decline in content sales and management focus on Internet Bundle, the new
product introduced this year. The sales of Internet Bundle started in the first
quarter of fiscal 2006.
The Company does not include the cost of its own employees in cost of services.
The Company intends to decrease content sales, traffic and membership sales as
being unprofitable, leaving Internet Bundle as a major source of revenue. The
Company's overall cost of sales is expected to increase with increasing of
Internet Bundle sales.
Administrative expenses were $491,588 (US$407,754) for the twelve months ended
March 31, 2005 representing 246% of revenue, compared to $904,915 (US$690,511)
for the twelve months ended March 31, 2004 representing 194% of revenue. The
main reason for the decrease in an administrative expense is attributable to the
decrease in revenue. Total decrease in administrative expenses was 45.7%
[$491,588(US$ 407,754) in fiscal 2005 compared to $904,915 (US$ 690,511) in
fiscal 2004]. Salaries and consulting fees included in administrative expenses.
Decline in revenue had an impact of 76.8% decrease in salaries [$89,974 (US$
74,383) in fiscal 2005 comparing to $387,008 (US$ 295,313) in 2004], 35.2%
decline in general and administrative expenses [$185,933 (US$ 153,714) in fiscal
2005 comparing to $286,999 (US$ 219,000) in 2004 due to decrease in consulting
fees. There was no material change in other administrative expenses as a result
of change in revenue.
Stock options compensation included in administrative expenses represent the
following. The Company currently issues stock options at the direction of the
Board of Directors. These options have been granted to employees, directors, and
consultants under the Company's stock option plan and any other terms and
conditions determined by the Board of Directors at the time the options are
issued. These options are granted with an exercise price equal to the market
price of the Company's stock on the date of the grant. The company accounts for
stock options
PAGE 7
granted in accordance with the fair value based method of accounting for stock
based compensation. The Company accounts for stock options granted in this plan
in accordance with the fair value based method of accounting for stock-based
compensation. The compensation cost that has been charged to income for this
plan is $10,800 for 2004 and $10,400 for 2005 respectively.
Selling expenses were $220,048 (181,918) for the period ended March 31, 2005
representing 110% of total revenue compared to $46,938 (35,816) for the period
ended March 31, 2004 representing 10% of total revenue. The increase in selling
expenses is attributable to Internet Bundle, the new product launched in January
2005. Selling expenses for Internet Bundle were $194,858 (161,093), representing
89% of the total of selling expenses. Computer expenses were $102,535 ($84,768)
in the twelve months ended March 31, 2005, representing 51% of revenue in that
period, compared to $110,290 (84,159) in the twelve months ended March 31, 2004,
representing 24% of revenue. Computer expenses have decreased due to the
decrease in bandwidth rates.
Twelve Months Ended March 31, 2004 Compared to the Twelve Months Ended March 31,
2003
For the twelve months ended March 31, 2004 revenue was $ 465,812 (355,446)
compared to $1,479,254 (1,006,775) for the period ending March 31, 2003. The
significant decline in revenue was mainly attributable to the decrease in sales
volume and prices. Also as a result of the unfavorable US exchange rate (1.3105
in year 2004 compared to 1.4693 in 2003), the revenue was decreased by $56,445.
Cost of sales was $ 122,055 (93,136) for the twelve months ended March 31, 2004
representing 26% of revenue for that period, compared to $ 529,820 (360,593)
representing 36% of revenue for the twelve months ended March 31, 2003. Cost of
Sales is directly influenced by the Company's sales mix among content sales,
traffic and membership sales. The main reason for the decrease in cost of sales
is attributable to the decrease in traffic sales. Cost of sales differs for each
of these categories, being lower in content sales and membership and higher in
traffic. The Company does not include the cost of its own employees in cost of
services. As the Company intends to increase traffic sales, the Company's
overall cost of sales is expected to increase.
Administrative expenses were $904,915 (690,511) for the twelve months ended
March 31, 2004 representing 194% of revenue, compared to $962,693 (655,205) for
the twelve months ended March 31, 2003 representing 65% of revenue. The main
reason for the decrease in an administrative expense is attributable to the
decrease in revenue.
Total decrease in administrative expenses was 6.0% [$904,915 (690,511) in fiscal
2004 compared to $962,693 (655,205) in fiscal 2003]. Salaries and company's
common stock trading fees are the part of administrative expenses. Decline in
revenue had an impact of 5% decrease in salaries [$408,004 (US$ 277,686) in year
2003 comparing to $387,008 (US$ 295,313) in 2004]. The decrease in salaries was
partly offset by an increase in fees related to company's common stock trading
[$35,669 (US $24,276) in year 2003 comparing to $47,062 (US $35,911) in 2004].
Revenue does not have an impact on the common stock trading fees.
There was no material change in other administrative expenses as a result of
change in revenue other then salaries.
Stock options compensation included in administrative expenses represent the
following. The Company currently issues stock options at the direction of the
Board of Directors. These options have been granted to employees, directors, and
consultants under the Company's stock option plan and any other terms and
conditions determined by the Board of Directors at the time the options are
issued.
PAGE 8
These options are granted with an exercise price equal to the market price of
the Company's stock on the date of the grant.The company accounts for stock
options granted in accordance with the fair value based method of accounting for
stock based compensation. The compensation loss that has been charged to income
for this plan is $44,280 and $10,800 for 2003 and 2004 respectively.
Selling expenses were $46,938 (35,816) for the period ended March 31, 2004
representing 10% of total revenue compared to $103,398 (70,372) for the period
ended March 31, 2003 representing 7% of total revenue. The decrease in selling
expenses is attributable to the decrease in advertising. Computer expenses were
$110,290 (84,159) in the twelve months ended March 31, 2004, representing 24% of
revenue in that period, compared to $316,010 (215,075) in the twelve months
ended March 31, 2003, representing 21% of revenue. Computer expenses have
decreased due to the decrease in bandwidth rates.
Contributed surplus, dilution gain and a minority interest in 2004 fiscal year
represents the following. During the year, the Company's wholly owned
subsidiary, Avrada Inc. ("Avrada"), issued from treasury 4,187,000 common shares
for proceeds of $559,144. The company recorded a dilution gain of $67,000, a
minority interest of $1,000 and contributed surplus of $491,144.
Twelve Months Ended March 31, 2003 Compared to the Twelve Months Ended March 31,
2002
For the twelve months ended March 31, 2003 revenue was $ 1,479,254 (1,006,775)
compared to $ 1,227,878 (782,337)for the period ending March 31, 2002. Cost of
sales were $ 529,820 (360,593) for the twelve months ended March 31, 2003
representing 36% of revenue for that period, compared to $ 348,525 (218,306)
representing 28% of revenue for the twelve months ended March 31, 2002. The main
reason for the increase in cost of sales is attributable to the increase in
revenue, the company's main focus for the twelve months ended March 31, 2003 was
to concentrate on the development and launching of new products to increase
their market share in buying and selling of traffic. The Administrative expenses
were $ 962,693 (655,205) for the twelve months ended March 31, 2003 representing
65% of revenue, compared to $1,369,681 (857,927) for the twelve months ended
March 31, 2002 representing 53% of revenue. The main reason for the increase in
an administrative expense is attributable to the increase in revenue. Selling
expenses were $103,398 (70,372) for the period ended March 31, 2003 representing
7% of total revenue compared to $61,059 (38,246) representing 5% for the twelve
months ended March 31, 2002. The Selling expenses remained relatively stable for
both periods. Computer expenses were $ 316,010 (215,075) in the twelve months
ended March 31, 2003, representing 21% of revenue in that period, compared to
$300,205 (188,039) for the twelve months ended March 31, 2002 representing 25%
of total revenue for that period.
Computer expenses have decreased; as there has been increased competition for
bandwidth there our price has dropped. The company has determined that goodwill
representing the value of the company's listing on a Canadian Stock Exchange is
permanently impaired, as the main market for the company shares has been moved
to the over the-counter bulletin board market ("OTC BB") in the United States.
Accordingly, an appropriate amount has been recorded as an impairment charge in
the statement of operations.
Twelve Months Ended March 31, 2002 Compared to the Twelve Months Ended March 31,
2001
For the twelve months ended March 31, 2002 revenue was $ 1,227,878 (782,337)
compared to $2,508,122 (1,590,439) for the period ending March 31, 2001. Cost of
PAGE 9
sales were $ 348,525 (218,306) for the twelve months ended March 31, 2002
representing 28% of revenue for that period, compared to $737,562 (467,699)
representing 29% of revenue for the twelve months ended March 31, 2001. The main
reason for the decrease in cost of sales is attributable to the decrease in
revenue, the company's main focus for the twelve months ended March 31, 2002 was
to concentrate on the development and launching of new products to increase
their market share in the online entertainment sector. The buying and selling of
traffic was very limited in the twelve months ended March 31, 2002. The
Administrative expenses were $ 1,369,681 (857,927) for the twelve months ended
March 31, 2002 to $ 1,318,372 (836,000) for the twelve months ended March 31,
2001 representing 53% of revenue. The administrative expenses remained
relatively stable for both periods in light of the significant decrease in
revenue. Selling expenses were $61,059 (38,246) for the period ended March 31,
2002 representing 5% of total revenue compared to $ 770,512 (488,594)
representing 31% for the twelve months ended March 31, 2002. The decrease in
selling expenses is attributable to the decrease in traffic sales. Computer
expenses were $300,205 (188,039) in the twelve months ended March 31, 2002,
representing 25% of revenue in that period, compared to $ 439,071 (278,422) for
the twelve months ended March 31, 2001 representing 18% of total revenue for
that period.
Computer expenses have decreased; as there has been increased competition for
bandwidth there our price has dropped. Goodwill has been amortized on a
straight-line basis beginning in the fiscal year March 2000 over an estimated
useful life of five years.
Item 5B
Liquidity and capital resources
Twelve Months ended March 31, 2005
Cash used in operating activities was $523,356 (432,669) for the twelve months
ended March 31, 2005, primarily attributable to a net loss of $821,476
(679,130).
Cash provided by financing activities in the twelve months ended March 31, 2005
was $519,242 (429,268) consisting of $105,237 (87,001) increase in advances from
shareholders, decrease in convertible notes payable of $8,461 (6,995), increase
in loans payable of $35,095 (29,014) offset by increase in capital stock of
$257,339 (212,747) and share issuance by subsidiary of $130,032 (107,500).
Cash used in investing activities for the twelve months ended March 31, 2005 was
$4,547 (3,759).
The company has very limited resources. In order to meet company's short cash
requirements, management intends to raise capital by issuing additional common
shares of the company. We anticipate raising these funds through private
placements of company securities with sophisticated investors. We have avoided
obtaining debt financing but may have to pursue this option if we are unable to
obtain equity financing on acceptable terms. We may experience difficulty in
obtaining funding on favorable terms, if at all. Any financing we might obtain
may contain covenants that restrict our freedom to operate our business or may
require us to issue securities that have rights, preferences or privileges
senior to our common stock and may dilute current shareholders' ownership
interest in the Company. To the extent that we require financing and are unable
to obtain it, we would be forced to significantly curtail our operations. The
company did not have any hedging activities. The company does not have any
material commitments for capital expenditures.
Twelve Months ended March 31, 2004
PAGE 10
Cash used in operating activities was $425,311 (324,541) for the twelve months
ended March 31, 2004, primarily attributable to a net loss of $926,835
(707,238).
Cash provided by financing activities in the twelve months ended March 31, 2004
was $425,733 (324,864) consisting of $241,650 (184,935) decrease in advances
from shareholders, decrease in convertible notes payable of $16,636 (12,694),
decrease in loans payable of $30,779 (123,487), decrease in note payable of
$15,000 (11,446) offset by increase in capital stock of $ 170,654 (130,220) and
share issuance by subsidiary of $559,144 (426,665).
Cash used in investing activities for the twelve months ended March 31, 2004 was
$648 (494).
The company has very limited resources. In order to meet company's short cash
requirements, management intends to raise capital by issuing additional common
shares of the company. We anticipate raising these funds through private
placements of company securities with sophisticated investors. We have avoided
obtaining debt financing but may have to pursue this option if we are unable to
obtain equity financing on acceptable terms. We may experience difficulty in
obtaining funding on favorable terms, if at all. Any financing we might obtain
may contain covenants that restrict our freedom to operate our business or may
require us to issue securities that have rights, preferences or privileges
senior to our common stock and may dilute current shareholders' ownership
interest in the Company. To the extent that we require financing and are unable
to obtain it, we would be forced to significantly curtail our operations. The
company did not have any hedging activities.
The company does not have any material commitments for capital expenditures.
Twelve Months ended March 31, 2003
Cash used in operating activities was $382,014 (259,997) for the twelve months
ended March 31, 2003, primarily attributable to a net loss of $ $764,341
(520,208).
Cash provided by financing activities in the twelve months ended March 31, 2003
was $389,896 (265,362) consisting of $141,012 (95,972) increase in advances from
shareholders, decrease in convertible note of $7,600 (5,173)and an increase in
capital stock of $ 302,605 (205,952), offset by decrease in loans payable of
$46,121 (31,390).
Cash used in investing activities for the twelve months ended March 31, 2003 was
$5,065 (3,447).
Twelve Months ended March 31, 2002
Cash used in operating activities was $633,978 (403,936) for the twelve months
ended March 31, 2002, primarily attributable to a net loss of $ 1,035,308
(659,641).
Cash provided by financing activities in the twelve months ended March 31, 2002
was $619,507 (388,041) consisting of $64,153 (40,184) increase in advances from
shareholders, increase in convertible note of $125,144 (79,735)and an increase
in capital stock of $ 195,600 (122,518), offset by decrease in loans payable of
$76,522 (47,931).
Cash used in investing activities for the twelve months ended March 31, 2002 was
$9,527 (5,967).
Twelve months ended March 31, 2001
Cash used in operating activities was $472,170 ($299,277) for the twelve months
ended March 31, 2001, primarily attributable to a net loss of $889,055
($593,815) and an increase in prepaid expenses and sundry receivables $28,357
($25,555), partially offset by a decrease in accounts receivable of $78,665
PAGE 11
($57,015) and an increase in accounts payable and accrued liabilities of
$299,339 ($180,587), and a decrease in deferred revenue of $30,714 ($21,763).
Cash used in operating activities for the seven months in 2000 was $355,456
($232,060), primarily attributable to a loss of $433,692 ($296,963) and an
increase in accounts receivable.
Cash provided by financing activities in the twelve months ended March 31, 2001
was $517,497 ($344,855) consisting of $9,271 ($8,325) decrease in advances to
shareholders, increase in loans payable of $76,561 (48,549), decrease in
advances from Jazz Monkey Media of $225,207 ($154,897), issue of capital stock
in the amount of $225,000 ($149,734).
Cash used in investing activities for the twelve months ended March 31, 2001 was
$111,245 ($74,306) consisting primarily of computer hardware. Cash used in
investing activities for the seven months ended March 31, 2000 was $67,808
($46,639).
Twelve Months ended March 31, 2005 compared to Twelve Months ended March 31,
2004
Cash used in operating activities was $523,356 (432,669) for the twelve months
ended March 31, 2005, primarily attributable to a net loss of $821,476
(679,130). For the same period in 2004 cash used in operating activities was
$584,667 (446,140), attributable to a net loss of $926,835 (707,238).
Cash provided by financing activities in the twelve months ended March 31, 2005
was $519,242 (429,268) consisting of $105,237 (87,001) increase in advances from
shareholders, decrease in convertible notes payable of $8,461 (6,995), increase
in loans payable of $35,095 (29,014) offset by increase in capital stock of
$257,339 (212,747) and share issuance by subsidiary of $130,032 (107,500).
For the twelve months ended March 31, 2004 cash provided by financing activities
was $425,734 (324,864) consisting of $241,650 (184,935) decrease in advances
from shareholders, decrease in convertible notes payable of $16,635 (12,694),
decrease in loans payable of $30,780 (123,487), decrease in note payable of
$15,000 (11,446) offset by increase in capital stock of $ 170,654 (130,220) and
share issuance by subsidiary of $559,144 (426,665).
Cash used in investing activities for the twelve months ended March 31, 2005 was
$4,547 (3,759).
Cash used in investing activities for the twelve months ended March 31, 2004 was
$648 (494).
We believe that our cash and cash requirements as at March 31, 2005 of
$2,723(2,251) together with funds raised in recent financing activities and
funds expected to be generated from operations and new product will be
sufficient to meet our cash requirements through March 31, 2006. There can be no
assurance that we will not require additional financing prior to that time.
Twelve Months ended March 31, 2004 compared to Twelve Months ended March 31,
2003
Cash used in operating activities was $425,311 (324,542) for the twelve months
ended March 31, 2004, primarily attributable to a net loss of 926,835 (707,238).
For the same period in 2003 cash used in operating activities was $382,014
(259,997), attributable to a net loss of $764,341 (520,208).
Cash provided by financing activities in the twelve months ended March 31, 2004
was $425,734 (324,864) consisting of $241,650 (184,935) decrease in advances
from
PAGE 12
shareholders, decrease in convertible notes payable of $16,635 (12,694),
decrease in loans payable of $30,780 (123,487), decrease in note payable of
$15,000 (11,446) offset by increase in capital stock of $ 170,654 (130,220) and
share issuance by subsidiary of $559,144 (426,665).
For the twelve months ended March 31, 2003 cash provided by financing activities
was $389,896 (265,362) consisting of $141,012 (95,972) increase in advances from
shareholders, decrease in convertible notes payable of $7,600 (5,173) and an
increase in capital stock of $302,605 (205,952), offset by decrease in loans
payable of $46,121 (31,390).
Cash used in investing activities for the twelve months ended March 31, 2004 was
$648 (494) compared to $5,065 (3,447) for the same period ended March 31, 2003.
Twelve Months ended March 31, 2003 Compared to Twelve Months ended March 31,
2002
Cash used in operating activities was $382,014 (259,997) for the twelve months
ended March 31, 2003, primarily attributable to a net loss of $ $764,341
(520,208). For the same period in 2002 cash used in operating activities was
$633,978 (403,936), attributable to a net loss of $ 1,035,308 (659,641).
Cash provided by financing activities in the twelve months ended March 31, 2003
was $389,896 (265,362) consisting of $141,012 (95,972) increase in advances from
shareholders, decrease in convertible notes payable of $7,600 (5,173) and an
increase in capital stock of $ 302,605 (205,952), offset by decrease in loans
payable of $46,121 (31,390). For the twelve months ended March 31, 2002 cash
provided by financing activities were $619,507 (388,041) consisting of $64,153
(40,184) increase advances from shareholders, increase in convertible notes
payable of $125,144 (79,735) and an increase in capital stock of $ 195,600
(122,518), offset by decrease in loans payable of $76,522 (47,931).
Cash used in investing activities for the twelve months ended March 31, 2003 was
$5,065 (3,447), compared to $9,527 (5,967) for the same period ended March 31,
2002.
Twelve Months ended March 31, 2002 Compared to Twelve Months ended March 31,
2001
Cash used in operating activities was $633,978 (403,936) for the twelve months
ended March 31, 2002, primarily attributable to a net loss of $ 1,035,308
(659,641). For the same period in 2001 cash used in operating activities was
$472,170 (315,390), attributable to a net loss of $ 889,056 (593,852).
Cash provided by financing activities in the twelve months ended March 31, 2002
was $619,507 (388,041) consisting of $64,153 (40,184) increase in advances from
shareholders, increase in convertible note of $125,144 (79,735) and an increase
in capital stock of $ 195,600 (122,518), offset by decrease in loans payable of
$76,522 (47,931).
For the twelve months ended March 31, 2001 cash provided by financing activities
were $517,497 (345,666) consisting of $ 76,561 (51,140) increase in loans
payable, offset by a decrease in capital stock of $407,931 (272,481).
Cash used in investing activities for the twelve months ended March 31, 2002 was
$9,527 (5,967), compared to $46,639 (31,153) for the same period ended March 31,
2001.
PAGE 13
Item 5F. Contractual obligations
The company has no contractual obligations except for lease commitments
disclosed in the Note 16 of Consolidated Financial Statements.
Item 6 A & C. Directors, Senior Management and Employees
Each of the three directors was re-elected at the Corporation's Annual General
Meeting of Shareholders held on December 24, 2004. Brad Estra, John A. van Arem
and Wayne Doss will hold office until the next Annual General Meeting or until
there successors are elected. We do not maintain insurance for the benefit of
our directors and officers against liabilities incurred by them in their
capacity as directors or officers. We do not maintain key man life insurance.
There is no family relationship between or among any of our directors and
executive officers. None of our directors has a contract with us providing for
benefits upon termination of his position as a director.
The following discusses the business experience, history and functions of our
directors and senior officers.
Brad Estra, Director. Mr. Estra's background is comprised of a solid mix of
professional and entrepreneurial experiences rooted in financial analysis,
strategic management, and accounting. A Presidential scholar who received his
bachelor's degree in finance and accounting with honors from Babson College, Mr.
Estra has a wide range of exposure to both public and private corporations in a
variety of industries. With a primary background in financial analysis and
strategic management, Mr. Estra spent two years with Swiss Bank Corp, and then
UBS, AG working on the trading floor of one of the world's largest investment
banks. Responsible for positioning the US Dollar book, Mr. Estra managed the
trade and purchase of over $10 billion a day. After leaving the
investment-banking world Mr. Estra purchased All Nursing Services, a South
Florida based home health agency. Estra's management and client marketing
strategies played a key role in the financial turn-around of a company suffering
from slumping revenue and the uncertainty of regulatory change. After
successfully managing ANS back to profitability with consistent growth in sales
and income, Mr. Estra has proven his ability to navigate in the profitable, yet
difficult market of South Florida health care.
Wayne Doss, 50, is an independent management consultant, formerly President &
Chief Executive Officer of Keller Ladders, Inc. and Biltbest of California, Inc.
(formerly Keller Industries, Inc) from 1993 to December 31, 1999.
John A. van Arem, 46, became the President, Director and Chairman of the Board
of the Corporation in December 1999. He has been the President of Web Dream Inc.
since February 1998. Mr. van Arem is responsible for overall management of the
Corporation and its subsidiaries. From 1992 to the present, Mr. van Arem has
been operating the online entertainment business that was incorporated as Web
Dream Inc. in 1998. From 1986 to 1992, Mr. van Arem owned and operated a
successful framing contracting company in Ontario, Canada.
Our Corporate Governance Committee performs an independent supervisory rollover
the management of the Corporation in accordance with its statutory obligations
and the role of an audit committee. We have no other committees of the board of
directors. Our Corporate Governance Policy requires that 2/3 of our Directors be
independent of management and free of any business or other relationship that
could materially interfere with the independent discharge of their duties. The
Directors and management are responsible for considering new appointees for
recommendation to the shareholders. The Board is charged with managing our
affairs with delegation of day-to-day activities to our President. The Board is
responsible for overseeing approval of our financial
PAGE 14
statements, business plans, major capital expenditures, raising capital and
other major financial activities, executive hiring, compensation, assessment and
succession, granting of stock options, decisions to devote resources to new
lines of business, organizational restructurings, acquisitions and divestitures.
All directors are required to declare their interests in transactions or matters
affecting the Corporation and refrain from voting with respect to such matters.
6B. COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT
Our directors do not receive any cash compensation from the Corporation for
acting as directors. They receive stock options periodically as determined by
the board and senior management, but there is no formal policy regarding such
grants. All such grants are subject to the terms of our stock option plan,
discussed under "Employees" below. In fiscal 2005, no stock options were granted
to any of directors, senior managers or employees. In March 2005, John A. van
Arem received 1,200,000 common shares of the Company as a compensation for
management fees.
The following table and notes show the compensation paid by us to John Alexander
van Arem for 2004 fiscal year.
Name Year Salary Other Number of Value of
Annual Common Shares Common Shares
Compen Issued Issued
sation
- ---------------------------------------------------------------------
John A. 2005 $ 0(1) $11,856 (2) 1,200,000 $ 141,000(3)
van Arem
(1) In the fiscal year 2004, Mr. van Arem's total salary for twelve months was
$0.
(2) Represents a monthly car allowance of $988.
(3) In April 2005, John A. van Arem received 1,200,000 common shares of the
Company for the total value of $141,000 as a compensation for management
fees.
6E. SHARE OWNERSHIP OF DIRECTORS AND SENIOR MANAGEMENT
The following table shows the share ownership of Directors and Senior Management
as of March 31, 2004.
NAME NUMBER OF SHARES PERCENTAGE OF
OWNED OUTSTANDING SHARES
John A. van Arem 2,149,000 (1)(2) 10%
Wayne Doss 372,500 (3) 2%
Brad Estra 337,500 (3) 2%
(1) These shares do not carry any voting or other rights that are different
from the rights attaching to the Corporation's common shares, which are
summarized in Item 9 "The Offer and Listing".
(2) The number of shares owned includes 217,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.14. These options
were granted on March 26, 2003 and expire on March 26, 2013.
PAGE 15
(3) The number of shares owned includes 70,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.14.
6D. EMPLOYEES
As of March 31, 2005, we had 2 full-time employees, compared to 4 at March 31,
2004. This reduction is attributable to management's decision to reduce
overhead. All of our full-time employees are located in Toronto and occupy
accounting or administrative positions. None of our employees are covered by a
collective bargaining agreement, and we believe that our relationship with our
employees is good. Our future success, however, will depend upon our ability to
attract and retain qualified personnel. Competition for qualified personnel
required in our business in particular is often intense, and there can be no
assurance that we will be able to attract and retain adequate numbers of
qualified personnel in the future.
Our share option plan (the "Plan") was established in 1997 for the purpose of
attracting and retaining highly qualified personnel by providing incentives in
the form of stock options. Under the Plan incentive share options for up to a
specified limit of 3,000,000 common shares may be granted from time to time by
the board of directors to our directors, officers, employees and consultants,
and to the directors, officers, employees and consultants of our subsidiaries.
Options granted under the Plan will have an exercise price equal to the market
price of the common shares on the day preceding the day of the grant as
determined by our board of directors, where the market price is the closing
price (or the closing bid and asked prices, as applicable) on the exchange or
market where the shares are listed or quoted as selected by the board of
directors, and will be exercisable over the period determined by the board of
directors. Unvested options granted under the Plan will immediately become fully
vested and exercisable upon the occurrence of any one of the following four
events:
- The acquisition of more than 50% of the beneficial ownership of our
outstanding voting securities; a consolidation or merger with another
company where our shareholders do not have the same proportionate ownership
in the surviving entity that they had prior to the merger, and we are
either (i) Not the continuing or surviving corporation, or (ii) our shares
are converted into cash, securities or other property;
- the sale, lease, exchange or other transfer of all or substantially all
of our assets; and
- our shareholders approve a plan of liquidation or dissolution.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
We are a publicly owned Canadian corporation. Another corporation or any
government does not control us directly or indirectly.
7A. MAJOR SHAREHOLDERS
The following table shows the ownership of our common shares as of March
31, 2004 of each person known to us to be the beneficial owner of more than 5%
of our outstanding common shares.
NAME NUMBER OF SHARES PERCENTAGE OF
OWNED OUTSTANDING
SHARES
John A. van Arem 2,149,000 (1)(2) 10%
Monteque Limited 2,000,000 (1) 9%
Shibumi Inc. 1,650,000 (1) 7%
PAGE 16
(1) These shares do not carry any voting or other rights that are different
from the rights attaching to the Corporation's common shares, which are
summarized in Item 9 "The Offer and Listing".
(2) The number of shares owned includes 217,000 options to purchase common
shares that are immediately exercisable at the price of CDN$0.14. These options
were granted on March 26, 2003 and expire on March 26, 2013.
7B. RELATED PARTY TRANSACTIONS
In fiscal 2004 the Company's wholly owned subsidiary, Avrada Inc. ("Avrada"),
issued from treasury 4,187,000 common shares for proceeds of $559,144. Each
share of Avrada was issued with one common share purchase warrant attached,
given the holder the option to purchase one additional common share of the
subsidiary at the cost of US$0.20, for the period of one year from the date of
agreement. As at March 31, 2005, the options are expired.
The company recorded a dilution gain of $67,000, a minority interest of $1,000
and a contributed surplus of $491,144.
In fiscal 2005, Avrada bought back 1,000,000 common shares for $135,000. In
fiscal 2005, Avrada issued from treasury 1,212,815 common shares for proceeds of
$130,032. Each share of Avrada was issued with one common share purchase warrant
attached, given the holder the option to purchase one additional common share of
the subsidiary at the cost of US$0.20, for the period of one year from the date
of agreement.
Subsequent to this, the Company held 4,007,607 common shares of Avrada or
40.4 per cent of the issued and outstanding shares
In the years 1998 and 1999, before the reverse takeover, Web Dream entered
into routine business transactions with Jazz Monkey Media Inc. a company
controlled by John van Arem and Anthony Korculanic. These transactions were in
the normal course of business and at market prices. At the present time, Jazz
Monkey Media Inc. provides us with bandwidth it has obtained from a third party.
Jazz Monkey Media Inc invoiced us for the net cost of these services.
We owed Mr. van Arem and Mr. Korculanic an aggregate of $249,324 as at
March 31, 2005. This amount is unsecured, bears no interest and has no fixed
term of repayment. (See Note 7 to our financial statements beginning at page F-1
of this registration statement.)
Management of the Corporation is not aware of any material interest, direct
or indirect, of any director, officer or any associate or affiliate of any of
the foregoing persons, in any matter to be acted upon. There may develop
potential conflicts of interest to which the proposed directors and officers of
the Corporation may be subject in connection with the operations of the
Corporation. Conflicts, if any will be subject to the procedures and remedies
under the Business Corporations Act (Ontario). See "Item 10B Memorandum and
Articles of Association - Bylaws; Director's Conflicts."
ITEM 8. FINANCIAL INFORMATION
8A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The financial statements required herein are set forth beginning on page
F-1 of this registration statement.
DIVIDEND POLICY
PAGE 17
On February 27, 2004, the Company issued by way of dividend 1,335,869
common shares of Avrada, formerly wholly owned subsidiary of the Company, to the
Company's shareholders. This distribution was based on one common share of
Avrada for every two common shares held.
On March 17, 2004, the Company issued 75 per cent stock split for its
shareholders of record on April 7, 2004 issued on April 26, 2004. The shares
were issued on April 26, 2004.
The Company did not pay any cash dividends in the last fiscal period and the
Board of Directors does not contemplate doing so in the foreseeable future. We
believe that it is in the best interests of the Corporation and its shareholders
to retain all earnings to fund operations and growth.
LEGAL PROCEEDINGS
There are currently two material claims pending against us. If we lose
either of these suits or enter into settlements requiring us to pay cash, our
liquidity and financial position could be adversely affected over the short
term.
In 2001, a claim was filed against the Company seeking return of the sum of
$82,115 plus interest plaintiff claimed to have advanced by way of loan to the
Company, whereas the monies clearly appear to have advanced to Jazz Monkey Media
Inc so that Phinder Technologies Inc should have no liability. There was little
activity in the claim and the outcome of the case is uncertain
In 1998, a claim was filed against the Company and its subsidiary seeking
damages of $2,000,000 resulting from a breach of a contract. The Company has
defended the claim on the basis that the contract was properly terminated.
Management believes this action will not have a material adverse effect on the
financial position of the Company and no provision has been accrued in these
financial statements. There has been no activity on this claim in the last 12
months.
ITEM 9. THE LISTING
COMMON SHARES
Each of our Common Shares carries one vote at all meetings of shareholders,
is entitled to dividends as and when declared by our Board of Directors and is
entitled upon liquidation, dissolution or winding-up to a pro rata share of the
assets distributable to holders of common shares. Our common shares carry no
conversion or pre-emptive rights. We have no other classes of shares. Pursuant
to section 23 (1) of the Business Corporations Act (R.S.O. 1990, c. B. 16),
which is our governing corporate legislation, our articles allow us to issue an
unlimited number of common shares at such time and to such persons and for such
consideration as the directors may determine. However, in certain circumstances
the Ontario Securities Act and the rules and policies of the Ontario Securities
Commission may require that we obtain shareholder approval to issue shares
TRANSFER AGENT
Our common shares are issued in registered form. Heritage Trust Company
located in Toronto, Ontario, Canada, is the registrar and transfer agent for our
common shares.
TRADING MARKET
Our common shares trade on over-the-counter bulletin board market ("OTC
BB") in the United States with the trading symbol " PHDTF ". In Canada our
common shares trade "over-the-counter" on the Canadian Unlisted Board ("CUB")
with the trading symbol "ROOS" (formerly "SMRL") and CUSIP # 71879N108.
PAGE 18
The CUB system was implemented in November 2000. It is only available to traders
and brokers for reporting trades that they have arranged in unlisted and
unquoted equity securities in Ontario. No real-time quotes or trades are
available to the public.
Prior to November 2000, our common shares traded on the Canadian Dealing
Network (CDN). The following table lists the reported high, low, closing prices
and the aggregate quarterly trading volumes on CDN for our common shares for the
eight fiscal quarters from December 31, 1998 to September 30, 2000.
CANADIAN DEALING NETWORK TRADING ACTIVITY
SALES (IN CANADIAN DOLLARS)
Period High Low Trading Volume
January 1 through March 15, 2001 * * *
Quarter ended December 31, 2000 $ 0.35 $ 0.25 11,111
Quarter ended September 30, 2000 $ 1.00 $ 0.40 271,054
Quarter ended June 30, 2000 $ 1.00 $ 0.40 20,698
Quarter ended March 31, 2000 $ 0.75 $ 0.50 22,640
Quarter ended December 31, 1999 $ 0.09 $ 0.01 **
Quarter ended September 30, 1999 $ 0.09 $ 0.01 5,133,722
Quarter ended June 30, 1999 $ 0.07 $ 0.01 1,282,167
Quarter ended March 31, 1999 $0.015 $0.015 287,723
Quarter ended December 31, 1998 $ 0.08 $ 0.01 419,000
*Since the formation of CUB, there is no record of quotations. On several
occasions in March 2001 we were advised by brokers trading in our common shares
that they were being offered at CDN$0.25. We are unable to conclusively
determine whether any trading occurred or the price of any trades.
**There were no trades reported during this period.
There can be no assurance that an active trading market for our common
shares will develop or be sustained.
On April 5, 2002 the Corporation was cleared for trading on the NASD OTC BB
under the symbol DGROF. We were cleared to submit a quote for $0.10 Bid to $
0.30.
Item 10B
MEMORANDUM AND ARTICLES OF ASSOCIATION
Incorporation: Originally a federally incorporated company, we were continued
Incorporation: Originally a federally incorporated company, we were continued as
an Ontario corporation under the Business Corporations Act (Ontario) by Articles
of Continuance dated October 30, 1998. We filed Articles of Amalgamation under
the name Storimin Resources Limited on April 1, 1999,Ontario Corporation number
1348061. By Articles of Amendment filed January 19,2000, we changed our name
from Storimin Resources Limited to Digital Rooster.com Inc Our Ontario
corporation number is 1348061. The Articles of Amalgamation provide in section 6
that there are no restrictions on the business that we may carry on or on the
powers that we may exercise. These provisions of our Articles of Amalgamation
have not been amended or revoked.
PAGE 19
Bylaws: Our bylaws explain the way our corporate affairs are to be
conducted. A copy of our bylaws is attached as Exhibit 2.1 to this registration
statement. As provided for in the legislation that governs us, a bylaw can be
made, amended or repealed at any time by our directors. If the directors make,
amend or repeal a bylaw, the bylaw, amendment or repeal must be submitted to our
shareholders at the next shareholder meeting. Our shareholders may confirm,
reject or amend the bylaw, amendment or repeal. (R.S.O. 1990, c. B.16, s.
116(2)). A shareholder may propose to make, amend or repeal a bylaw. Such a
proposal must be submitted to our shareholders for adoption at the next
shareholder meeting.
Borrowing powers: Our borrowing powers are authorized by section 2.05 and
section 3.01 of our bylaws. The financial institutions with which our banking
business is to be conducted are to be determined by our board of directors or
any committee or person designated by our board of directors to make such
determination (section 2.05). Our board of directors, or any committee or person
designated by our board of directors, is authorized to borrow money, issue,
reissue, sell or pledge bonds, debentures, notes or other evidences of
indebtedness on our behalf. Our board of directors, or any committee or person
designated by our board of directors, is also authorized to secure or guarantee
on our behalf the performance of any present or future indebtedness, liability
or obligation of any person. The board of directors is authorized to exercise
the borrowing powers described above without obtaining authorization from our
shareholders.
Director's Appointment and Quorum: A quorum for the transaction of business
at any meeting of the board of directors is set in section 4.01 of our bylaws to
be at least a majority of the directors. The board of directors can determine
that a quorum shall be more than a majority. Our directors are not required to
hold any of our common shares. Section 404 of our bylaws provides that our
shareholders may by resolution passed at a meeting specially called for such
purpose remove any director from office and fill the vacancy created by such
removal.
Director's Conflicts: Section 4.18 of our bylaws governs conflicts of
interest involving our directors. That section provides that a director or
officer who is a party to, or who is a director or officer of, or has a material
interest in any person who is a party to, a material contract or proposed
material contract with the Corporation, shall disclose the nature and extent of
his interest at the time and in the manner provided by the Business Corporations
Act (Ontario). The relevant provisions of that Act as of the date of this
registration statement provide that a director or officer of a corporation who
(a) is a party to a material contract or transaction or proposed material
contract or transaction with the corporation, or (b) is a director or an officer
of, or has a material interest in, any person who is a party to a material
contract or transaction or proposed material contract or transaction with the
corporation, shall disclose in writing to the corporation or request to have
entered in the minutes of meetings of directors the nature and extent of his
other interest. (R.S.O. 1990, c. B.16, s. 132 (1).) Any such contract or
proposed contract may be referred to the board or shareholders for approval even
if such contract is one that in the ordinary course of the Corporation's
business would not require approval by the board or shareholders. Such a
director shall not vote on any resolution to approve the same except as provided
by the Act.
Section 4.19 of our bylaws provides that subject to any unanimous shareholder
agreement, the directors shall be paid such remuneration for their services and
reimbursed for expenses properly incurred as the board may from time to time
determine. Directors are not precluded from serving us in any other capacity and
receiving remuneration therefore
Director's Indemnity: Section 7 of our bylaws set forth certain protections
PAGE 20
for our directors and officers. Section 7.01 provides that no director or
officer shall be held liable for any losses or liabilities provided that in
exercising his powers and discharging his duties he acts honestly and in good
faith with a view to our best interests and exercises the care, diligence and
skill that a reasonably prudent person would exercise in comparable
circumstances. These provisions of our bylaws do not relieve any director or
officer from the duty to act in accordance with the Act and the regulations
there under or from liability for breach of such laws.
Shareholder's Meetings: Our board of directors, our chairman of the board
or our president are responsible for setting the date and place for the annual
general meeting of shareholders, which by law must be held no later than fifteen
months after the last annual meeting. The purpose of the annual meeting is to
consider our financial statements and reports, elect directors, appoint an
auditor and transact any other business (section 8.01). Section 8.02 of our
bylaws provides that our board, our chairman of the board, or our president has
the power to call a special meeting of shareholders at any time.
Section 8.04 of our bylaws specifies the requirements for calling a
shareholder meeting. That section requires that notice of the time and place of
each meeting of shareholders shall be given not less than 21 nor more than
50days before the date of the meeting to each director, to our auditor and to
each shareholder who at the close of business on the record date for notice is
entered in the securities register as the holder of one or more shares carrying
the right to vote at the meeting. Notice of a meeting of shareholders called for
any purpose other than consideration of the financial statements and auditor's
report, election of directors, and reappointment of the incumbent auditor must
state the nature of such business in sufficient detail to permit the shareholder
to form a reasoned judgment thereon and shall state the text of any special
resolution to be submitted to the meeting.
We are required by section 8.05 of our bylaws to prepare a list of shareholders
entitled to receive notice of a meeting, arranged in alphabetical order and
showing the number of shares held by each shareholder entitled to vote at the
meeting. If a record date for the meeting is fixed, the shareholders listed are
those registered at the close of business on the record date. If no record date
is fixed, the shareholders listed are those registered at the close of business
on the day immediately preceding the day on which notice of the meeting is given
or, where no such notice is given, on the day on which the meeting is held. The
list is to be made available for examination by any shareholder during usual
business hours at our registered office or at the place where our central
securities register is maintained and at the meeting. Where a separate list of
shareholders has not been prepared, the names of persons appearing in the
securities register at the requisite time as the holder of one or more shares
carrying the right to vote at such meeting will be deemed to be a list of
shareholders.
Section 8.06 of our bylaws sets out the requirements for setting a record
date. Our directors are not required to set a record date, but if they do, the
record date must not precede the date of the shareholder's meeting by more than
50daysory less than 21 days. If our board does not fix a record date, the record
date for the determination of the shareholders entitled to receive notice of a
meeting shall be at the close of business on the day immediately preceding the
day on which the notice is given, or if no notice is given, the day of which the
meeting is held.
A shareholder meeting may be held without notice if the requirements
setouts in section 8.07 of our bylaws are met. These are requirements that must
be met are: (a) all the shareholders entitled to vote at the meeting are
presenting person or represented, or if those not present or represented waive
notice have Or otherwise consent to the meeting, and (b) our auditors are
present or waive Notice have or otherwise consent to the meeting. The meeting
PAGE 21
can only proceed without notice having been given if the shareholders, auditors
or directors Present are not attending for the express purpose of objecting to
the Transaction of any business on the grounds that the meeting is not lawfully
called.
Section 8.10 of our bylaws states that the quorum required in order to
conduct business at a shareholder's meeting two individuals present in person,
each of whom is a shareholder or proxy holder entitled to vote at the meeting.
Section 8.11 of our bylaws provides that every person named in the shareholder
list is entitled to vote the number of shares shown on the list opposite their
name. Every question to be decided at a shareholders meeting shall, unless
otherwise required by law, be determined by a majority of the votes cast on the
question (section 8.15).
Section 8.12 of our bylaws governs the rights of a shareholder to appoint a
proxy holder or representative to attend a shareholder meeting and vote at that
meeting on the shareholder's behalf. A proxy must be in writing and signed by
the shareholder or his or her attorney. Where a shareholder is a corporation or
association, it may authorize an individual to represent it at a shareholder
meeting. The authority of such an individual must be given by a resolution of
the corporation or shareholder and deposited with us.
Section 8.18 of our bylaws allows the chairman at a shareholders meeting to
adjourn the meeting provided that the shareholders consent to the adjournment.
If a shareholder meeting is adjourned for less than 30 days, notice of the
adjourned meeting does not have to be given. If a shareholder meeting is
adjourned by one or more adjournments for a total of 30 days or more, then
notice of the adjourned meeting must be given as required for an original
meeting.
Item 10D
EXCHANGE CONTROLS
The federal Investment Canada Act (the "ICA"), which became effective on
June 30, 1985, regulates the acquisition by non-Canadians of control of a
Canadian Business (as defined in the ICA). Such an acquisition is either
modifiable or review able depending on its structure and the value of the assets
of the Canadian business being acquired. In effect, the ICA requires review by
Investment Canada, the agency which administers the ICA, and approval by the
Canadian government in the case of an acquisition of control of a Canadian
business by a non-Canadian that is a WTO Investor (as defined in the ICA) where:
(i) In the case of a direct acquisition of control of a Canadian entity (i.e.,
through a share purchase), the assets of the entity carrying on the
Canadian Business and of all other entities in Canada, the control of which
is acquired exceeds CDN $209 million (this threshold is adjusted annually
for inflation and growth in Canada's domestic product); or (ii) in the case
of a direct acquisition of assets of a Canadian Business (i.e., through an
asset acquisition) the value of the assets used in carrying on the Canadian
business exceeds CDN $209 million. Where an investor is not a WTO Investor,
review is required where: (i) in the case of a direct acquisition of
control of a Canadian Business, the value of the assets of the business and
all other entities being acquired is CDN $5 million or more; or (ii) in the
case of an indirect acquisition of control of a Canadian Business, where
the Canadian Business has assets of CDN $50 million or more in value; or
(iii) in the case of an acquisition of assets of a Canadian Business, the
assets represents more than50% of the assets of the original group and the
value of the acquired assets exceeds CDN $5 million.
PAGE 22
In the context of the Corporation three methods of acquiring control of a
Canadian business are regulated by the ICA: (i) the acquisition of all or
substantially all of the assets used in carrying on the Canadian business; (ii)
the acquisition, directly or indirectly, of voting shares of a Canadian
corporation carrying on the Canadian business; (iii) the acquisition of voting
shares of an entity which controls, directly or indirectly, another entity
carrying on a Canadian business. An acquisition of a majority of the voting
interests of an entity, including a corporation, is deemed to be an acquisition
of control under the ICA. An acquisition of less than one-third of the voting
shares of a corporation is deemed not to be an acquisition of control. An
acquisition of less than a majority, but one-third or more, of the voting shares
of a corporation is presumed to be an acquisition of control unless it can be
established that on the acquisition the corporation is not, in fact, controlled
by the acquirer through the ownership of voting shares. For partnerships, trusts
joint ventures or other unincorporated entities; an acquisition of less than a
majority of the voting interests is deemed not to be an acquisition of control.
10E. TAXATION
MATERIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the material Canadian federal income tax
considerations generally applicable in respect of the holding and disposition of
common shares reflects the Corporation's opinion. The tax consequences to any
particular holder of common shares will vary according to the status of that
holder as an individual, trust, corporation or member of a partnership, the
jurisdiction in which that holder is subject to taxation, the place where that
holder is resident and, generally, according to that holder's particular
circumstances.
This summary is applicable only to holders who are resident solely in the
United States, have never been resident in Canada, deal at arm's length with the
Corporation, hold their common shares as capital property and who will not use
or hold the common shares in carrying on business in Canada.
This summary is based upon the provisions of the Income Tax Act of Canada
and the regulations there under (collectively, the "Tax Act" or "ITA") and the
Canada-United States Tax Convention (the "Tax Convention") as at the date hereof
and the current administrative practices of Revenue Canada, Taxation. This
summary does not take into account provincial income tax consequences.
This summary is not exhaustive of all possible income tax consequences.
It's not intended as legal or tax advice to any particular holder of common
shares and should not be so construed. Each holder should consult his own tax
advisor with respect to the income tax consequences applicable to him in his own
particular circumstances.
Dividends
In the case of any dividends paid to non-residents, we withhold the
Canadian tax and pay only the net amount to the shareholder. The rate of
withholding tax is generally 25% but by virtue of Article X of the Tax
Convention, the rate of tax on dividends paid to persons who are residents only
of the United States for purposes of the Tax Convention is generally limited to
15% of the gross dividend (or 5% in the case of certain corporate shareholders
owning at least 10% of our voting shares).
Dispositions
PAGE 23
A non-resident of Canada is not subject to tax under the ITA in respect of
a capital gain realized upon the disposition of a common share unless the share
is "taxable Canadian property" to the holder thereof and the non-resident is not
otherwise entitled to relief under a tax treaty. In the case of a non-resident
holder to whom our shares represent taxable Canadian property and who is
resident only in the United States for purposes of the Tax Convention, no tax
under the ITA will be payable on a capital gain realized on such shares by
reason of the Tax Convention unless the value of such shares is derived
principally from real property situated in Canada. We believe that the value of
our common shares is not derived from real property situated in Canada.
A common share of the Corporation will be taxable Canadian property to
anon-resident holder if, at any time during the period of five years immediately
preceding the disposition, the non-resident holder, persons with whom then
on-resident holder did not deal at arm's length, or the non-resident holder
together with persons with whom the holder did not deal at arm's length owned
25% or more of the issued shares of any class or series of the Corporation. In
addition, a common share will be taxable Canadian property if the shares are not
listed on a prescribed stock exchange.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion that encompasses all of the material United
States Federal income tax consequences, under the law, generally applicable to a
U.S.Holder (as defined below) of our common shares. This discussion does not
address all potentially relevant Federal income tax matters and it does not
address consequences peculiar to persons subject to special provisions of
Federal income tax law, such as, for example, tax-exempt organizations,
qualified retirement plans, persons subject to alternative minimum tax,
financial institutions, insurance companies, real estate investment trusts,
regulated investment companies, broker-dealers, non-resident alien individuals
or foreign corporations whose ownership of common shares of the Corporation is
not effectively connected with the conduct of a trade or business in the United
States and shareholders who acquired their shares through the exercise of
employee share options or otherwise as compensation. In addition, this
discussion only applies to common shares held by U.S. Holders as capital assets
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"), and does not cover any state, local or foreign tax
consequences.
The following discussion is based upon the sections of the Code, Treasury
Regulations, published Internal Revenue Service ("IRS") rulings, published
administrative positions of the IRS and court decisions that are currently
applicable, any or all of which could be materially and adversely changed,
possibly on a retroactive basis, at any time. The following discussion is for
general information only and is not intended to be, nor should it be construed
to be, legal or tax advice to any holder or prospective holder of common shares
of the Corporation and no opinion or representation with respect to the United
States Federal income tax consequences to any such holder or prospective holder
is made. Accordingly, holders and prospective holders of common shares of the
Corporation should consult their own tax advisors about the federal, state;
local and foreign tax consequences of purchasing, owning and disposing of our
common shares.
U.S. Holders
As used herein, a ("U.S. Holder") includes a holder of our common shares
who is a citizen or resident of the United States, a partnership or corporation
organized under the laws of the United States, an estate, the income of which is
subject to United States federal income tax without regard to its source and a
trust if a United States court is able to exercise primary supervision over
PAGE 24
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust or if the trust was
inexistence on August 20, 1996 and has elected to continue to be treated as a
United States person, and any other person or entity whose ownership of our
common shares is effectively connected with the conduct of a trade or business
in the United States.
Distributions on our Common Shares
U.S. Holders receiving dividend distributions (including constructive dividends)
with respect to our common shares are required to include in gross income for
United States Federal income tax purposes the gross amount of such distributions
to the extent that we have current or accumulated earnings and profits, without
reduction for any Canadian income tax withheld from such distributions. Such
Canadian tax withheld may be credited, subject to certain limitations, against
the U.S. Holder's United States Federal Income tax liability or, alternatively,
may be deducted in computing the U.S. Holder's United States Federal taxable
income by those who itemize deductions. (See more detailed discussion at
"Foreign Tax Credit" below). To the extent that distributions exceed our current
or accumulated earnings and profits, they will be treated first as a return of
capital up to the U.S. Holder's adjusted basis in the common shares and
thereafter as gain from the sale or exchange of the common shares. Preferential
tax rates for long-term capital gains are applicable to an U.S. Holder, which is
an individual, estate or trust. There are currently no preferential tax rates
for long-term capital gains for an U.S. Holder, which is a corporation.
Dividends paid in Canadian dollars will be included in income in an U.S. Dollar
amount based on the exchange rate at the time of their receipt. U.S. Holders
should consult their own tax advisors regarding the treatment of any foreign
currency gain or loss on any Canadian dollars received as a dividend, which are
converted into U.S. dollars on a date subsequent to receipt.
Dividends paid on our common shares will not generally be eligible for the
dividends received deduction provided to corporations receiving dividends from
certain United States corporations. A U.S. Holder which is a corporation may,
under certain circumstances, be entitled to a 70% deduction of the United States
source portion of dividends received from the Corporation (unless we qualify as
a "foreign personal holding Corporation" or a "passive foreign investment
Corporation", as defined below) if such U.S. Holder owns shares representing at
least 10% of the voting power and value of the Corporation. The availability of
this deduction is subject to several complex limitations, which are beyond the
scope of this discussion.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian income
tax with respect to the ownership of our common shares may be entitled, at the
option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim a
credit because a credit reduces United States Federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on an annual basis and applies to all
foreign income taxes (or taxes in lieu of income tax) paid by (or withheld from)
the U.S. Holder during the year. There are significant and complex limitations
which apply to the credit, among which is the general limitation that the credit
cannot exceed the proportionate share of the U.S. Holders United States income
tax liability that the U.S. Holder's foreign source income bears to his/her or
its worldwide taxable income.
In the determination of the application of this limitation, the various
items of income and deduction must be classified into foreign and domestic
PAGE 25
sources. Complex rules govern this classification process. There are further
limitations on the foreign tax credit for certain types of income such as
passive income", "high withholding tax interest", "financial services income","
shipping income", and certain other classifications of income. In certain
circumstances, recently enacted legislation and other guidance issued by the
United States Treasury may deny a United States holder foreign tax credits (and
instead may allow deductions) for foreign taxes imposed on a dividend if the
United States holder (i) has not held the common shares for at least 16 days in
the 30-day period beginning 15 days before the ex-dividend date, during which it
is not protected from risk of loss; (ii) is obligated to make payments related
to the dividends; or (iii) holds the common shares in arrangements in which the
United States holder's expected economic profit, after non-US taxes, is
insubstantial.
The availability of the foreign tax credit and the application of the
limitations on the credit are fact specific and holders and prospective holders
of common shares of the Corporation should consult their own tax advisors
regarding their individual circumstances.
Disposition of our Common Shares of the Corporation
A U.S. Holder will recognize gain or loss upon the sale of our common
shares equal to the difference, if any, between (i) the amount of cash plus the
fair market value of any property received and (ii) the shareholder's tax basis
in our common shares. Any gain recognized on the sale or other disposition of
common shares will generally be U.S. source income. Any loss recognized on the
sale or other disposition of common shares will generally be U.S. source.
However, such loss will be foreign source to the extent certain dividends were
received by the U.S. Holder within the 24-month period preceding the date on
which the loss was recognized. This gain or loss will be capital gain or loss if
the common shares are capital asset in the hands of the U.S. Holder, which will
be a short-term or long-term capital gain or loss depending upon the holding
period of the U.S. Holder. Gains and losses are netted and combined according to
special rules in arriving at the overall capital gain or loss for a particular
tax year. Deductions for net capital losses are subject to significant
limitations. For U.S. Holders who are individuals, a capital loss is deductible
only to the extent of capital gains, plus ordinary income of up to U.S.
$3,000; any unused portion of such net capital loss may be carried over to be
used in later tax years until such net capital loss is thereby exhausted. For
U.S. Holders that are corporations (other than corporations subject to
Subchapter of the Code), any unused net capital loss may be carried back three
years from the loss year and carried forward five years from the loss year to be
offset against capital gains until such net capital loss is thereby exhausted.
If the amount realized on a sale or exchange is not denominated in U.S. dollars,
the amount realized will be equal to the U.S. dollar value thereof, determined
at the spot rate on the date of the sale or exchange.
Other Considerations
In the following two circumstances, the above sections of the discussion
may not describe the United States Federal income tax consequences resulting
from the holding and disposition of our common shares. Based on (a) the number
of shareholders of our common shares and (b) the majority ownership of our
shares by Canadian residents, we do not believe that it is either a" Foreign
Personal Holding Corporation" or a "Controlled Foreign Corporation."
10H. INSPECTION OF DOCUMENTS
Documents referred to in this registration statement may be inspected at
our executive offices at 366 Bay Street, 12th floor, Toronto, Ontario, M5H
4B2, during normal business hours.
PAGE 26
ITEM 11: QUANTITATIVE AND QUALITATIVE ASSESSMENT OF MARKET RISK
EXCHANGE RATE SENSITIVITY
Substantially large amounts of our revenues are earned in United States
dollars, and expenses are incurred in Canadian dollars. Increases in the value
of the Canadian dollar relative to the United States dollar could adversely
affect our results of operations. We do not engage in any foreign currency
hedging policies. To the extent that we are not able to or do not raise our
prices to reflect an adverse change in exchange rates, our profitability would
be adversely affected. The impact of future exchange rates fluctuations on our
results of operations and financial condition cannot be accurately predicted.
PAGE 27
Part III
Item 17. FINANCIAL STATEMENTS
Audited Financial Statements
Page
Phinder Technologies Inc.
For the year ended March 31, 2005 and 2004
Auditors' Report F1
Financial Statements and Notes F2 - F15
PAGE 28
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(EXPRESSED IN CANADIAN DOLLARS)
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
MARCH 31, 2005 AND 2004
(EXPRESSED IN CANADIAN DOLLARS)
CONTENTS
PAGE
Auditors' Report 1
Consolidated Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Deficit 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
AUDITORS' REPORT
To the Shareholders of
Phinder Technologies Inc. (formerly known as Digital Rooster.com Ltd.)
We have audited the consolidated balance sheets of Phinder Technologies Inc.
(formerly known as Digital Rooster.com Ltd.) as at March 31, 2005 and 2004 and
the consolidated statements of operations, deficit and cash flows for the years
ended March 31, 2005, 2004 and 2003. These financial statements are the
responsibility of the corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the corporation as at March 31, 2005 and
2004 and the results of operations and its cash flows for the years ended March
31, 2005, 2004 and 2003 in accordance with Canadian generally accepted
accounting principles.
The Company's consolidated financial statements dated June 17, 2005 have been
restated to give effect to adjustments described in Note 2(b), 19 and 20. We
have audited these adjustments, and in our opinion, such adjustments are
appropriate and have been properly applied.
Toronto, Ontario /s/ Mintz and Partners LLP
June 17, 2005, except as to CHARTERED ACCOUNTANTS
Note 2(b), 19 and 20, which are
as of August 25, 2005
CANADA - U.S. REPORTING DIFFERENCES
a) Going Concern Basis of Presentation
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph when the financial statements are effected by
conditions and events that cast substantial doubt on the company's ability to
continue as a going concern, such as those described in Note 1 to the financial
statements.
b) Comments By Auditors
Our report to the shareholders dated June 17, 2005 is expressed in accordance
with Canadian reporting standards, which do not permit a reference to such
events and conditions in the auditor's report when these are adequately
disclosed in the financial statements.
Toronto, Ontario /s/ Mintz and Partners LLP
June 17, 2005, except as to CHARTERED ACCOUNTANTS
Note 2(b), 19 and 20, which are
as of August 25, 2005
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 2005 2004
[RESTATED- [RESTATED -
NOTE 2 (B), NOTE 2 (B),
19 AND 20] 19 AND 20]
=========================================================================
A S S E T S
-----------
CURRENT
Cash $ 2,723 $ 11,384
Accounts receivable 9,365 18,396
Prepaids and sundry receivables 41,845 13,534
------------- -------------
53,933 43,314
PROPERTY AND EQUIPMENT (Note 3) 57,463 73,543
------------- -------------
$ 111,396 $ 116,857
============= =============
L I A B I L I T I E S
---------------------
CURRENT
Accounts payable and accrued liabilities $ 1,004,461 $ 907,656
Deferred revenue 6,146 874
Convertible notes payable (Note 5) 89,146 100,908
Loans payable (Note 6) 35,095 -
------------- -------------
1,134,848 1,009,438
DUE TO SHAREHOLDERS (Note 7) 249,324 9,086
MINORITY INTEREST (Note 10) 1,000 1,000
------------- -------------
1,385,172 1,019,524
------------- -------------
S H A R E H O L D E R S' DEFICIENCY
-----------------------------------
CAPITAL STOCK (Note 9) 3,158,521 2,731,086
CONTRIBUTED SURPLUS (Note 10) 569,156 546,224
DEFICIT (5,001,453) (4,179,977)
------------- -------------
(1,273,776) (902,667)
------------- -------------
$ 111,396 $ 116,857
============= =============
APPROVED ON BEHALF OF THE BOARD
/s/ John van Arem /s/ Wayne Doss
- ------------------ ---------------
================================================================================
See Accompanying Notes 2.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE YEARS ENDED MARCH 31, 2005 2004 2003
[RESTATED - [RESTATED - [RESTATED -
NOTE 2 (B), NOTE 2 (B), NOTE 2 (B),
19 AND 20] 19 AND 20] 19 AND 20]
============================================================================================
DEFICIT - beginning of year
As previously reported $ (4,191,897) $ (3,208,862) $ (2,488,801)
Change in accounting policy and (55,080) (44,280) -
correction of error (Note 2(b), 19 and 20)
Correction of accounting error (Note 19 and 20) 67,000 - -
------------- ------------- -------------
Deficit - as restated (4,179,977) (3,253,142) (2,488,801)
NET LOSS (821,476) (926,835) (764,341)
------------- ------------- -------------
$ (5,001,453) $( 4,179,977) $( 3,253,142)
============= ============= =============
================================================================================
See Accompanying Notes 3.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2005 2004 2003
[RESTATED - [RESTATED - [RESTATED -
NOTE 2 (B), NOTE 2 (B), NOTE 2 (B),
19 AND 20] 19 AND 20] 19 AND 20]
====================================================================================
REVENUES $ 199,794 $ 465,812 $ 1,479,254
COST OF REVENUES 32,277 122,055 529,820
------------- ------------- -------------
GROSS PROFIT 167,517 343,757 949,434
------------- ------------- -------------
EXPENSES
Administrative 491,588 904,915 962,693
Selling 220,048 46,938 103,398
Management fees 132,018 221,000 77,759
Computer 102,535 110,290 316,010
Interest 22,177 25,431 41,208
Amortization 20,627 29,018 38,456
Impairment of Goodwill (Note 4) - - 190,501
Impairment of Intangibles (Note 13) - - 58,750
------------- ------------- -------------
988,993 1,337,592 1,788,775
------------- ------------- -------------
NET LOSS - before under noted items (821,476) (993,835) (839,341)
Gain on dilution (Note 10) - 67,000 -
Settlement of debt (Note 8) - - (75,000)
------------- ------------- -------------
NET LOSS $ (821,476) $ (926,835) $ (764,341)
============= ============= =============
LOSS PER SHARE (Note 11) $ (0.07) $ (0.13) $ (0.30)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 12,135,646 7,359,209 2,540,846
================================================================================
See Accompanying Notes 4.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2005 2004 2003
[RESTATED - [RESTATED - [RESTATED -
NOTE 2 (B), NOTE 2 (B), NOTE 2 (B),
19 AND 20] 19 AND 20] 19 AND 20]
==============================================================================================
OPERATING ACTIVITIES
Net loss $ (821,476) $ (926,835) $ (764,341)
Adjustment for non-cash items:
Amortization of property and equipment 20,627 29,018 38,456
Management fees paid by issuance of shares 17,500 221,000 -
Consulting services paid by issuance of shares 107,975 102,350 45,000
Consulting services paid by issuance of
Subsidiary shares 17,500 - -
Rent paid by issuance of shares 41,322 -
Employee stock option expense 10,400 - -
Settlement of debt by issuance of shares - 46,000 -
Expense paid by issuance of stock option - - 14,000
Dilution gain (Note 10) - (67,000) -
Impairment of goodwill - - 190,501
Settlement of debt - - (75,000)
Impairment of intangibles - - 58,750
------------- ------------- -------------
(606,152) (584,667) (448,354)
Changes in non-cash balances related to
operations (Note 12) 82,796 159,356 66,340
------------- ------------- -------------
CASH FLOWS USED IN
OPERATING ACTIVITIES (523,356) (425,311) (382,014)
------------- ------------- -------------
INVESTING ACTIVITIES
Additions to property and equipment (4,547) (648) (5,065)
------------- ------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES (4,547) (648) (5,065)
------------- ------------- -------------
FINANCING ACTIVITIES
Advances from shareholders 105,237 (241,650) 141,012
Convertible notes payable (8,461) (16,636) (7,600)
Increase (decrease) in loans payable 35,095 (30,779) (46,121)
Note payable (Note 8) - (15,000) -
Issuance of capital stock 257,339 170,654 302,605
Share issuance by subsidiary 130,032 559,144 -
------------- ------------- -------------
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES 519,242 425,733 389,896
------------- ------------- -------------
NET CHANGE IN CASH (8,661) (226) 2,817
CASH - Beginning of year 11,384 11,610 8,793
------------- ------------- -------------
CASH - End of year $ 2,723 $ 11,384 $ 11,610
============= ============= =============
================================================================================
See Accompanying Notes 5.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003
================================================================================
Non-cash transactions:
During 2005, the Company entered into the following non-cash transactions:
- The Company issued 2,659,500 common shares for consulting services of
$107,975.
- The Company issued 70,000 common shares for rent of $41,322.
- The Company recognized stock options compensation loss of $10,400.
- The Company issued 650,000 common shares for management services of
$17,500.
- The Company issued 175,000 common shares of its subsidiary for
consulting services of $17,500.
- The Company issued 20,000 common shares as repayment of $3,301 on a
convertible note payable.
- The Company bought back 1,000,000 shares of its subsidiary, Avrada Inc
for $135,000. The amount payable was adjusted against advances from
shareholders.
During 2004, the Company entered into the following non-cash transactions:
- The Company issued 1,700,000 common shares for management services of
$221,000.
- The Company issued 1,041,000 common shares for consulting services of
$102,350.
- The Company issued 460,000 common shares on settlement of debt of
$46,000.
- The Company recognized stock options compensation loss of $10,800.
- On March 17, 2004 the Company declared 75 per cent stock dividend to
its shareholders. Shareholders of record April 7, 2004 receive 3
additional shares for every four shares held. The stock dividend
effected as a stock split and the shareholders have received no
monetary value.
During 2003, the Company entered into the following non-cash transactions:
- The Company acquired certain assets of Real 1-on-1 Inc., a Toronto
based online adult entertainment company by issuing 235,000 restricted
common shares for a consideration of $58,750 (Note 13).
- The Company granted 467,000 stock options at an exercise price of
$0.25 per share with an intrinsic value of $14,000.
- The Company issued 9,000,000 common shares on pre-consolidation basis
(180,000 common shares on post-consolidation basis) for consulting
services of $45,000.
- The Company recognized stock options compensation loss of $44,280.
================================================================================
See Accompanying Notes 6.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
1. NATURE OF COMPANY'S OPERATIONS AND BASIS OF PRESENTATION
On February 1, 2005 the Company changed its name from Digital Rooster.com
Ltd. to Phinder Technologies Inc.
Phinder Technologies Inc. (the "Company"), formerly known as Digital
Rooster.com Ltd., its formerly wholly owned subsidiary Avrada Inc. and its
wholly owned Web Dream Inc. and Pizay Investments Inc. ("the Group") derive
their revenue also from the license of video content, monthly subscriptions
to the website content and TeleCenter hotel advertising.
In October 2004, the Company acquired a new wholly owned US based
subsidiary named Axcess Internet Solutions Inc. The subsidiary provides
subscriptions to YellowPages.biz, an online business directory that
includes web hosting, unlimited Internet access, web based email and a
customized web site.
GOING CONCERN BASIS OF PRESENTATION
These financial statements have been prepared in accordance with generally
accepted accounting principles applicable to a going concern that
contemplates the realization of assets and the payment of liabilities in
the ordinary course of business. Accordingly, they do not give effect to
adjustments that would be necessary should the company be unable to
continue as a going concern. In other than the normal course of business,
the Company may be required to realize its assets and liquidate its
liabilities and commitments at amounts different from those in the
accompanying financial statements. Because of the operating losses of the
past three years and the working capital deficiency as at March 31, 2005,
the Company's continuance as a going concern is dependent upon its ability
to obtain adequate financing or to reach profitable levels of operation. It
is not possible to predict whether financing efforts will be successful or
if the company will attain profitable levels of operations.
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
a) Basis of presentation
These consolidated financial statements have been prepared in
accordance with Canadian Generally Accepted Accounting Principles.
Significant differences between Canadian Generally Accepted Accounting
Principles and United States Generally Accepted Accounting Principles,
as they relate to these consolidated financial statements, are
explained in Note 17.
b) Change in accounting policy
Effective January 1, 2004, the CICA handbook, Section 3870
"Stock-Based Compensation and Other Stock-Based Payments" was amended
to require expense treatment of all stock-based compensation and
payments for options granted on or after January 1, 2002. To reflect
this change in the accounting policy, prior years' financial
statements were restated.
This change results in an increase in net loss by $10,400, 10,800 and
$44,280 for the fiscal years ended March 31, 2005, 2004 and 2003
respectively, an increase of $55,080 and $44,280 to the opening
deficit of fiscal 2005 and 2004 respectively and an increase in
contributed surplus by $65,480, $55,080 and $44,280 for the fiscal
2005, 2004 and 2003 respectively.
================================================================================
/Continued 7.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION - CONTINUED
c) Use of estimates
The preparation of these consolidated financial statements, in
conformity with Canadian Generally Accepted Accounting Principles, has
required management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent liabilities as at March 31, 2005 and 2004 and the revenue
and expenses reported for the periods then ended. Actual results may
differ from those estimates.
d) Revenue recognition
Revenue from monthly subscriptions to the website is deferred upon
receipt of payment and is recognized as revenue as the services are
provided.
Revenue from the license of video contents and access to the Company's
website to wholesale customers is recognized as the services are
provided under the terms of the contract.
Revenue from advertisements on the website of the Company is
recognized when all the significant obligations have been completed,
the fees are fixed and determinable and collectability of such fees is
reasonably assured. Revenue from an advertising barter transaction is
recorded only if the fair value of the advertising surrendered in the
transaction is determinable based on the entity's own historical
practice of receiving cash for the similar barter transactions within
the preceding six month period.
If the fair value of the advertising surrendered in the barter
transaction is not determinable, the advertising income from the
barter transaction is recorded based on the carrying amount of the
advertising surrendered, which is generally nil.
Revenue from web traffic is recognized when all significant
obligations are completed, the fees are fixed and determinable and
collectability of the fees is reasonably assured.
e) Property and equipment
Property and equipment are recorded at cost, less accumulated
amortization. Amortization is provided over the estimated useful lives
of the assets as follows:
Furniture and fixtures - 20% declining balance
Leasehold improvements - 20% straight line
Computer hardware - 30% declining balance
Computer software - 100% straight line
Property and equipment purchased during the period are amortized at
one-half of the above stated rates.
f) Income taxes
The Company follows the asset and liability approach to accounting and
reporting for income taxes. The income tax provision differs from that
calculated by applying the statutory rates to the changes in current
or future income tax assets or liabilities during the period.
The Company provides a valuation allowance to reduce future income tax
assets when it is more likely than not that the asset will not be
realized.
================================================================================
/Continued 8.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION - CONTINUED
g) Foreign currency translation
The reporting currency in these consolidated financial statements is
the Canadian dollar. Accordingly, assets and liabilities denominated
in U.S. dollars have been translated into Canadian dollars at the
exchange rate prevailing at the balance sheet date other than common
stock, which has been translated at historical rates. Results of
operations have been translated at the average exchange rate for the
period.
h) Costs of raising capital
Incremental costs incurred in respect of raising capital are charged
against equity proceeds raised.
i) Non-monetary transactions
Transactions in which shares or other non-cash consideration are
exchanged for assets or services are valued at the fair value of the
assets or services involved in accordance with Section 3830
("Non-monetary transactions") of the CICA Handbook.
j) Stock-based compensation
Employees
For stock-based compensation issued to employees, the Company
recognizes an expense. The Company accounts for its grants in
accordance with the fair value-based method of accounting for
stock-based compensation.
Non-employees
For stock-based compensation issued to non-employees, the Company
recognizes an asset or expense based on the fair value of the equity
instrument issued.
k) Loss per share
The Company has adopted the treasury stock method of calculating
diluted earnings/loss per share. Under this method, the exercise of
options is assumed to have occurred at the beginning of the period and
the related common shares are assumed to have been issued at that
time. The proceeds from the exercise are assumed to have purchased
common shares of the Company for cancellation at the average market
price during the period. The incremental shares (the difference
between the number of shares assumed issued and the number of shares
assumed purchased) are included in the denominator of the diluted
earnings/loss per share calculation. Fully diluted loss per share will
not be calculated, as the effect on the loss per share would be
anti-dilutive
================================================================================
/Continued 9.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
3. PROPERTY AND EQUIPMENT
As At March 31, 2005
---------------------
Accumulated Net Carrying
Cost Amortization Amount
------------ --------------------- -------------
Furniture and equipment $ 45,978 $ 29,038 $ 16,940
Leasehold improvements 8,141 8,141 -
Computer hardware 240,952 200,429 40,523
Computer software 20,958 20,958 -
------------ --------------------- -------------
$ 316,029 $ 258,566 $ 57,463
============ ===================== =============
As At March 31, 2004
---------------------
Accumulated Net Carrying
Cost Amortization Amount
------------ --------------------- -------------
Furniture and equipment $ 45,978 $ 24,803 $ 21,175
Leasehold improvements 8,141 8,141 -
Computer hardware 236,404 184,036 52,368
Computer software 20,958 20,958 -
------------ --------------------- -------------
$ 311,481 $ 237,938 $ 73,543
============ ===================== =============
================================================================================
/Continued 10.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
4. GOODWILL
During the year 2003, the Company reviewed the carrying value of Goodwill
for impairment. The company has determined that goodwill representing the
value of the company's listing on a Canadian Stock Exchange is permanently
impaired, as the main market for the company shares has been moved to the
over the-counter bulletin board market ("OTC BB") in the United States.
Accordingly, the carrying amount of goodwill of $190,501 has been recorded
as an impairment charge in the statement of operations.
5. CONVERTIBLE NOTES PAYABLE
The convertible notes payable are non-interest bearing, unsecured and
payable within the current fiscal year. The notes are convertible, at the
option of the lenders, at a conversion rate of US $7.14 per common share
for a total of approximately 11,200 common shares.
6. LOANS PAYABLE
The loans payable consist of US$25,000 that is unsecured, bear no interest
and have no fixed terms of repayment and US$5,000 that is unsecured, bear
annual interest of 9% and is due on August 15, 2005.
7. DUE TO SHAREHOLDERS
Shareholders' advances are unsecured, bear no interest and while there are
no fixed terms of repayment, the lenders have agreed not to demand payment
before September 1, 2006.
8. NOTE PAYABLE
The company's wholly-owned subsidiary, Pizay Investments Inc. ("Pizay"),
entered into an agreement with ProAm Exploration Corporation with an
exclusive option to acquire an undivided 10% interest in the property. As a
part of the agreement, a non-interest bearing demand note payable of
$90,000 was issued. The agreement was terminated in 1999. The non-interest
bearing note arising from a dispute in 1999 was settled for $15,000 in cash
in July, 2003. Accordingly, a gain on settlement of this debt of $75,000
has been recorded.
================================================================================
/Continued 11.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
9. CAPITAL STOCK
a) Authorized
Unlimited number of common shares
Issued and outstanding Number Carrying amount
---------- ----------------
Balance as at April 1, 2003 2,442,664 $ 2,191,082
Issued for cash 2,450,975 170,654
Issued for consulting services 1,041,000 102,350
Issued for management services 1,700,000 221,000
Issued as loan repayment 460,000 46,000
---------- ----------------
Balance as at March 31, 2004 8,094,639 2,731,086
Additional shares issued (i) 4,738,590 -
Issued for cash 6,106,768 257,338
Issued for consulting services 2,659,500 107,975
Issued for management services 650,000 17,500
Issued for rent 70,000 41,322
Issued as convertible note payable repayment 20,000 3,300
---------- ----------------
Balance as at March 31, 2005 22,339,497 $ 3,158,521
========== ================
On March 17, 2004, the Company declared a 75 percent split of the Company's
Common Shares effected by means of a dividend. Every four outstanding whole
common shares became entitled to three additional common shares. Share
certificates representing the stock dividend were mailed on or after April 26,
2004 to shareholders of record as of the close of business on April 7, 2004. The
effect of increasing the number of Company's outstanding common shares by 75
percent is reflected in the weighted average number of shares outstanding and
earnings per share.
(i) Additional shares issued represent the net of the 6,110,490 shares issued on
75 percent stock split and subsequent cancellation of 1,371,900 shares.
================================================================================
/Continued 12.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
9. CAPITAL STOCK - CONTINUED
b) Stock options
The Company currently issues stock options at the direction of the Board of
Directors. These options have been granted to employees, directors, and
consultants under the Company's stock option plan and any other terms and
conditions determined by the Board of Directors at the time the options are
issued. These options are granted with an exercise price equal to the
market price of the Company's stock on the date of the grant. The Company
accounts for stock options granted in this plan in accordance with the fair
value based method of accounting for stock-based compensation. The
compensation cost that has been charged to income for this plan is $10,800
for 2004 and $10,400 for 2005 respectively.
The fair value of each option grant is estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for options granted in March 2003: dividend yield of nil;
expected volatility of 170 percent, risk-free interest rate of 4.0 percent
and expected life of 2 years. A summary of the status of the company's
stock option plan as of March 31, 2004 and 2005, and changes during the
years ending on those dates is presented below.
Wt. Avg. Wt. Avg.
Exercise Options Exercise
Number Price Exercisable Price
--------- --------- ------------ ---------
Balance, April 1, 2003 393,870 $ 0.37 93,870 $ 0.37
Cancelled (146,870) 0.25 (146,870) 0.25
Granted - - - -
Exercised - - - -
--------- --------- ------------ ---------
Balance, March 31, 2004 and 2005 247,000 $ 0.44 247,000 $ 0.44
========= ========= ============ =========
Options outstanding and exercisable at March 31, 2005 are as follows:
Outstanding Exercisable
----------- -----------
Wt. Avg.
Expiry Remaining Wt. Avg. Exercise
Number Date Life Exercise Price Number Price
----------- ----------- --------- -------------- ----------- --------
247,000 March, 2013 8 0.44 247,000 0.44
247,000 247,000
=========== ===========
No stock options were granted during the years ended March 31, 2004 and 2005.
================================================================================
/Continued 13.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
10. CONTRIBUTED SURPLUS
Balance as at April 1, 2003 $ 44,280
Avrada common shares issued for cash in Fiscal 2004 491,144
Change in accounting policy - stock-based compensation (Note 2(b) and 19) 10,800
----------
Balance as at March 31, 2004 546,224
Buyback of shares (135,000)
Issued for cash 130,032
Issued for consulting services 17,500
Change in accounting policy - stock-based compensation (Note 2(b) and 19) 10,400
----------
Balance as at March 31, 2005 $ 569,156
==========
In fiscal 2004 the Company's wholly owned subsidiary, Avrada Inc.
("Avrada"), issued from treasury 4,187,000 common shares for proceeds of
$559,144. The company recorded a dilution gain of $67,000, a minority
interest of $1,000 and contributed surplus of $491,144. Each share of
Avrada was issued with one common share purchase warrant attached, giving
the holder the option to purchase one additional common share of the
subsidiary at the cost of US$0.20, for the period of one year from the date
of agreement. As at March 31, 2005, the options have expired.
In fiscal 2005, Avrada bought back 1,000,000 common shares for $135,000. In
addition, Avrada issued 1,212,815 common shares from treasury for proceeds
of $130,032. Each share of Avrada was issued with one common share purchase
warrant attached, giving the holder the option to purchase one additional
common share of the subsidiary at the cost of US$0.20, for a period of one
year from the date of the agreement. In Fiscal 2005, 175,000 common shares
of Avrada were issued in return for consulting services of $17,500. The
resultant dilution gain for these three transactions was insignificant and
has not been recorded.
11. LOSS PER SHARE
Basic loss per share is calculated on the basis of the weighted average
number of common shares outstanding for the year. Loss per share has not
been presented on a fully diluted basis, as the effect would be
anti-dilutive.
================================================================================
/Continued 14.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
12. CHANGES IN NON-CASH OPERATING ITEMS AND SUPPLEMENTAL CASH FLOW DISCLOSURE
Changes in non-cash operating items:
March 31, March 31, March 31,
2005 2004 2003
----------- ----------- -----------
Decrease in accounts receivable $ 9,031 $ 37,784 $ 57,930
(Increase) decrease in prepaid and sundry receivables (28,311) 5,196 (1,826)
Increase (decrease) in deferred revenue 5,272 (2,472) (167,621)
Increase in accounts payable and accrued liabilities 96,804 118,848 178,397
----------- ----------- -----------
$ 82,796 $ 159,356 $ 66,340
=========== =========== ===========
Interest paid $ 22,177 $ 25,431 $ 41,208
=========== =========== ===========
13. ACQUISITION OF REAL 1-ON-1 INC AND IMPAIRMENT OF INTANGIBLES
During 2003, the Company acquired certain assets of Real 1-on-1 Inc., a
Toronto based online adult entertainment company, by issuing 235,000 common
shares for a consideration of $58,750 representing a 50% discount from its
trading value of the common share at the date of the transaction. Such
common shares are not free trading as they are subject to restriction as to
when they may be sold. Accordingly, this discount was applied to reflect
the fair value of the share consideration. All consideration was in respect
of customer contacts, business concepts and related intangible assets. At
the year end, the Company assessed the value of its intangible assets
acquired and determined that the value of these assets were impaired due to
insignificant revenue generated and significant doubts on the Company's
ability to successfully integrate the acquired assets with the existing
business and achieve positive operating and cash flow results within a
predictable time. Accordingly, the assets have been written down to $Nil.
There were no such assets acquired in the year ended March 31, 2004 and
March 2005.
14. CONTINGENT LIABILITIES
a) In 1998, a claim was filed against the Company and its subsidiary
seeking damages of $2,000,000 resulting from a breach of a contract.
The Company has defended the claim on the basis that the contract was
properly terminated. Management believes this action will not have a
material adverse effect on the financial position of the Company and
no provision has been accrued in these financial statements. There has
been no activity on this claim in the last 12 months.
b) In 2001, a claim was filed against the Company seeking return of the
sum of $82,115 plus interest plaintiff claimed to have advanced by way
of loan to the Company, whereas the monies clearly appear to have
advanced to Jazz Monkey Media Inc so that Phinder Technologies Inc.
should have no liability. There was little activity in the claim and
the outcome of the case is uncertain.
================================================================================
/Continued 15.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
15. LEASE COMMITMENTS
The subsidiary of the Company is obligated under operating leases for its
premises, vehicles and equipment. The lease of premises expires on May 31st
2007.
Future minimum payments for its operating leases as at March 31, 2005 are
approximately as follows:
2006 $ 75,000
2007 $ 72,000
2008 $ 12,000
16. INCOME TAXES
The provision for income taxes differs from the expense that would be
obtained by applying statutory rates as a result of the following:
2005 2004 2003
---- ---- ----
Amount % Amount % Amount %
---------- -------- ---------- ---------- --------- ---------
Combined statutory basic
Canadian federal and
provincial tax rates $(300,000) (36.12) $(360,000) $(263,500) (36.60) (36.60)
Loses for which no
income tax benefits
have been recorded and
other permanent
differences 300,000 36.12 360,000 36.60 263,500 36.60
---------- -------- ---------- ---------- --------- ---------
$ - $ - $ - $ - $ - $ -
========== ======== ========== ========== ========= =========
The Company has available non-capital losses, the benefits of which have
not been recorded, of approximately $ 4,850,000 to be applied against
future taxable income. The losses expire as follows:
2006 $ 133,000
2007 614,000
2008 771,000
2009 1,052,000
2010 490,000
2011 960,000
2015 830,000
-------
$4,850,000
==========
The nature and effects of the temporary differences that give rise to
significant portions of the future income tax asset is as follows:
March 31, March 31,
2005 2004
------------ ------------
Future income tax asset - Losses carried forward $ 1,800,000 $ 1,500,000
Valuation allowance (1,800,000) (1,500,000)
------------ ------------
Net future income tax asset $ - $ -
============ ============
No future income tax asset has been recorded in respect of the above because the
company cannot determine whether it is more likely than not that it will be able
to realize the future income tax assets during the carry forward period.
================================================================================
/Continued 16.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
17. FAIR VALUE OF FINANCIAL STATEMENTS
The Company's financial assets and liabilities are valued at management's
best estimates of fair values as follows:
(i) Accounts receivable
The carrying amount is equal to the fair value due to the
liquidity of the assets.
(iii) Accounts payable, convertible notes payable, loans payable and
due to shareholders
The fair value of accounts payable, convertible notes payable,
loans payable and due to shareholders is not equal to carrying
value, as the amounts are non-interest bearing. As the amounts
have no terms of repayment, the fair value cannot be calculated
with any degree of certainty.
18. BUSINESS SEGMENTS AND GEOGRAPHICAL INFORMATION
The subsidiary of the Company has been operating in one business segment
only, being monthly subscription to, and license of, website and video
contents.
Geographical information
Information as to sales and accounts receivable by reportable geographic
segments is:
March 31, March 31, March 31,
2005 2004 2003
---------- ---------- ----------
Sales
-----
Canada 31% 10% 4%
United States 69% 90% 96%
Accounts receivable
-------------------
United States 74% 93% 100%
Canada 26% 7%
19. CORRECTION OF ERRORS
The consolidated financial statements as at March 31, 2005, 2004 and 2003
and for the years then ended have been corrected for accounting errors made
regarding the stock-based compensation expense.
As a result, stock-based compensation expense for the year ended March 31,
2005 has been decreased from $49,000 to $10,400. The consolidated
statements of operations and deficit for the years ended March 31, 2004 and
2003 have been restated to record the stock-based compensation expense of
$10,800 and $44,280 respectively instead of charging the stock-based
compensation expense of $49,000 directly to the statement of deficit for
the year ended March 31, 2004.
Net loss for the year ended March 31, 2005 has been decreased by $38,600
and net loss for the year ended March 31, 2004 and 2003 has been increased
by $10,800 and $44,280 respectively. Deficit for the year ended March 31,
2005 has been decreased by $32,520 and increased by $6,080 and $44,280 for
the years ended March 31, 2004 and 2003 respectively and contributed
surplus amount has been decreased by $32,520 as at March 31, 2005 and
increased by $6,080 and $44,280 as at March 31, 2004 and 2003 respectively.
================================================================================
/Continued 17.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
19. CORRECTION OF ACCONTING ERRORS - continued
The consolidated financial statements as at March 31, 2004 and for the year
then ended have been corrected for an accounting error made regarding the
recognition of minority interest, contributed surplus, dilution gain and
goodwill on the issuance of 4,187,000 common shares from treasury of the
company's subsidiary, Avrada Inc. ("Avrada") for proceeds of $559,144.
As a result of the above correction, comparative amounts for minority
interest balance has been decreased from $559,144 to $1,000 and the
contributed surplus amount has been increased by $491,144 in the
consolidated balance sheet, and the impairment of goodwill has been
decreased from $234,840 to $Nil and the gain on dilution has been reduced
from $234,840 to $67,000 in the consolidated statements of operations.
20. RESTATEMENT OF PRIOR YEARS FINANCIAL STATEMENTS
The consolidated financial statements have been restated to include the
consolidated statements of operations and the consolidated statements of
cash flows for the three years ended March 31, 2005, 2004, and 2003 in
accordance with the requirements of Items 8 and 17 of Form 20-F and Rule
3-02 of Regulation S-X and to give effect to the change in accounting
policy (Note 2(b)) and correction of errors (Note 19).
================================================================================
/Continued 18.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
21. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES
The consolidated financial statements of the Company have been prepared in
accordance with Canadian generally accepted accounting principles
("Canadian GAAP"). There are no material differences between the Canadian
GAAP used in preparing the balance sheets, income statements and the
statements of cash flows and those that would apply had the statements been
prepared in accordance with U.S. GAAP.
DIFFERENCE BETWEEN CANADIAN AND U.S. GAAP AND ADDITIONAL DISCLOSURE
a) Accounting changes
In accordance with Canadian GAAP, the effect of a correction of an
accounting error and a change in accounting policy [Note 7(b)] is
recorded retroactively by restating prior year's financial statements.
U.S. GAAP also requires that the effect of a correction of accounting
error and changes in accounting policy to be recorded directly by
restatement of prior years financial statements. There are no
significant differences between U.S. and Canadian GAAP with respect to
changes recorded in these financial statements.
b) Accounts receivable
U.S. GAAP requires disclosure of allowance for doubtful account in the
financial statements.
The Company has not recorded any such allowance for the periods
presented in these financial statements.
c) Information as to products, geographic markets, significant estimates
and concentrations
United States GAAP requires information as to products, geographic
markets, significant estimates and concentrations, to be disclosed in
the notes to financial statements. This information is usually
disclosed with the summary of significant accounting policies. Such
information is provided in Note 18.
d) Differences in various accounting terms used in U.S. GAAP and Canadian
GAAP
The following is a summary:
U.S. GAAP Canadian GAAP
---------------------------- -------------------
Deferred income taxes Future income taxes
Depreciation of tangible Amortization
capital assets
Excess of cost over fair Goodwill
value of net assets acquired
================================================================================
/Continued 19.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
21. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES - CONTINUED
e) Recent accounting pronouncements
U.S. GAAP (Securities and Exchange Commission Staff Accounting
Bulletin 74) requires that recently enacted pronouncements that may
have an impact on financial statements be discussed and the impact, if
known, disclosed. Accordingly, under U.S. GAAP, the following
disclosures are required:
(i) In January 2003, the FASB issued Interpretation No. 46 ("FIN 46")
Consolidation of Variable Interest Entities, which addresses the
consolidation of variable interest entities ("VIEs") by business
enterprises that are the primary beneficiaries. A VIE is an
entity that does not have sufficient equity investment at risk to
permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack
the characteristics of a controlling financial interest. The
primary beneficiary of a VIE is the enterprise that has the
majority of the risks or rewards associated with the VIE. In
December 2003, the FASB issued a revision to FIN 46,
Interpretation No. 46R ("FIN 46R"), to clarify some of the
provisions of FIN 46, and to defer certain entities from adopting
until the end of the first interim or annual reporting period
ending after March 15, 2004. Application of FIN 46R is required
in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose
entities for periods ending after December 15, 2003. Application
for all other types of VIEs is required in financial statements
for periods ending after March 15, 2004. We believe we have no
arrangements that would require the application of FIN 46R. We
have no material off-balance sheet arrangements.
(ii) In April 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". This Statement improves and
clarifies financial reporting for derivative instruments and
hedging activities under SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities". Management does not expect
that the adoption of SFAS 149 will have a material effect on the
Company's operations or financial position.
(iii) In May 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 150
"Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" (the
"Statement"). The Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The Statement is
generally effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15,
2003. The adoption of this Statement had no effect on the
Company's consolidated financial statements.
================================================================================
/Continued 20.
PHINDER TECHNOLOGIES INC.
(FORMERLY KNOWN AS DIGITAL ROOSTER.COM LTD.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005, 2004 AND 2003
================================================================================
21. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES DIFFERENCES -
CONTINUED
(iv) In December 2004, the Financial Accounting Standard Boards
("FASB") issues Statements No. 123 (R), Share - Based Payments
which will require compensation costs related to share based
payment transactions to be recognized in the financial
statements. As permitted by the predecessor Statement No. 123, we
do not recognizecompensation expense with respect to stock
options we have issued because the option price was no greater
than the market price at the time the option was issued.
Statement 123(R) will be effective for us in our fiscal quarter
beginning January 1, 2006. We have not completed an evaluation of
the impact of Adopting Statements 123 (R).
(v) In November 2004, the FASB ratified the Emerging Issues Task
Force ("EITF") consensus on Issue 03 -13, "Applying the
Conditions in Paragraph 42 of FASB Statement No 144, "Accounting
for the impairment or Disposal of Long Lived Assets," in
Determining Whether to Report Discontinued Operations. The
adoption of the new pronouncements will not have a material
impact on our financial position or results of operations.
(vi) In November 2004, the FASB issued Statement No. 151 Inventory
costs, an amendment of ARB No. 43, Chapter 4, to clarify that
abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage) should be recognized as
current period charges, and that fixed production overheads
should be allocated to inventory based on normal capacity of
production facilities. Statement No. 151 will be effective for
our fiscal year beginning January 1,2006, and its adoption will
not have a material impact on our financial position or Results
of operations.
================================================================================
21.
PHINDER TECHNOLOGIES INC.
(Formerly known as Digital Rooster.com Ltd.)
Attached hereto are the following exhibits:
12.1 Certificate of the Chief Executive Officer pursuant to S302 of the Sarbanes
Oxley Act of 2002
12.2 Certificate of the Chief Financial officer pursuant to S302 of the Sarbanes
Oxley Act of 2002
13.1 Certificate of the Chief Executive Officer pursuant to S906 of the Sarbanes
Oxley Act of 2002
13.2 Certificate of the Chief Financial officer pursuant to S906 of the Sarbanes
Oxley Act of 2002